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QL 330.973 . . 

QAL SreiT?TiT 

lur Shastri Academy 



LIBRARY /^r<2i-5 
Accession No.... 




Class No 33.0..*.3.n3.. 

Book No 



By the same Author 



Xhe Affluent 



Tlic economist, like et^cryotie else, must cottccrn 
himselj' u/ith the ultimate aitns of man. 

Alfred Marshall 



First published in Great Britain, 1958 
by Hamish Hamilton Ltd 
90 Great Russell Street London WCi 

© 1958 by John Kenneth Galbraith 

Second Impression, December 1958 
Third Impression, February 1959 
Fourth Impression, June 1959 
Fifth Impression, March i960 
Sixth Impression, September i960 






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Since I sailed for Switzerland in the early sununer of 1955 to begin 
work on this book I have accumulated a large and cosmopolitan set 
of obligations. Thus a Guggenheim fellowship facilitated diat move- 
ment as did my wife, Catherine A. Galbraidi. She also typed copy, 
checked references, and revised proof and had a corrective influence 
whai my skill in identifying problems too grossly exceeded my 
facility in solving them. I am grateful to the librarians at the Palais 
dcs Nations, as, at Harvard, for their help, and to the imiversity 
students in Geneva on whom I first tried out die core of these ideas. 
I also used many of these ideas in a series of lectures given under the 
auspices of the Haynes Foundation at the California Institute of 
Technology in January 1957 . 1 would like to thank the Foundation, 
the Institute, and my long-time fliend Alan Sweezy for arranging this 
trial run and for allowing publication in this form. The chapter on 
poverty toward the end draws heavily on research financed by a 
grant firom the Carnegie Corporation. My good fiicnd and assistant, 
Rudi M. Parks, took responsibility for the whole tedious task of 
manuscript preparation, for whidi I am also most grateful. 

I have never quite imderstood why publishers, who are said to be 
human, do not get tired of authors. Probably they do, but those with 
whom I have been so happily associated conceal it with a rare and 
kindly skill. 

Two of my colleagues, Arthur M. Schlesingcr, Jr., and Carl 
Elaysen, read the manuscript or proof, and I accepted nearly all of 
their suggestions. I owe debt to the much larger group of people who, 
by suggestion or persuasion, led me to problems or solutions I had 
not previously seen. Thus my colleague Seymour £. Harris, the most 




diligent and useful of all economists, began several years ago to 
question the current stereotypes on public finance. Had it not been 
for him, liberals would have been spared the present proposals for a 
greatly expanded use of the sales tax. To go fardier afield. Governor 
Luis Munoz-Maiin first persuaded me to question the wisdom of our 
preoccupation with more and more consumer goods as a goal And 
any number of odicr points, large and small, were stiggested to me 
by colleagues, fiicnds, and students. Authorship of any sort is a 
&ntastic indulgence of the ego. It is well, no doubt, to reflect on how 
much one owes to others. 


Cambridge, Massachusetts 
March igsS 


The Affluent Society 

Wealth is not without its advantages and the case to the contrary, 
although it has often been made, has never proved widely per- 
suasive. But, beyond doubt, wealth is tlie relentless enemy of under- 
standing. The poor man has always a precise view of his problem and 
its remedy: he hasn’t enough and he needs more. The rich man can 
assume or imagine a much greater variety of ills and he will be 
correspondingly less certain of tlieir remedy. Also, until he learns to 
live with his wealth, he will have a well-observed tendency to put it 
to the wrong purposes or otherwise to make himself fooHsh. 

As with individuals so witli nations. And the experience of nations 
with well-being is exceedingly brief. Nearly all throughout all his- 
tory have been very poor. The exception, almost insignificant in die 
whole span of human existence, has been the last few generations in 
the comparatively small comer of die world populated by Euro- 
peans. Here, and especially in the United States, there has been great 
and quite unprecedented affluence. 

The ideas by which the people of this favoured part of the world 
interpret their existence, and in measure guide their behaviour, were 
not forced in a world of wealth. These ideas were the product of a 
world in which poverty had always been man’s normal lot, and any 
other state was in degree unimaginable. This poverty was not the 
elegant torture of the spirit which comes from contemplating an- 
other man’s more spacious possessions. It was the unedifying morti- 
fication of the flesh— fixim hunger, sickness, and cold. Those who 
mig^t be freed temporarily from such burden could not know when 
it would strike again, for at best hunger yielded only perilously to 

B I 



privation. It is improbable that the poverty of the masses of the 
people was made greatly more bearable by the feet that a very few— 
those upon whose movements nearly all recorded history centres 
—were very rich. 

No one would wish to argue that the ideas which interpreted diis 
world of grim scarcity would serve equally well for die contem- 
porary United States. Poverty was the all-pervasive feet of that 
world. Obviously it is not of ours. One would not expect that die 
preoccupations of a poverty-ridden world would be relevant in one 
where die ordinary individual has access to amenidcs— foods, enter- 
tainment, personal transportation, and plumbing— in which not even 
the rich rejoiced a century ago. So great has been the change that 
many of the desires of die individual are no longer even evident to 
him. They become so only as they arc synthesized, elaborated, and 
nurtured by advertising and salesmanship, and these, in turn, have 
become among our most important and taloited professions. Few 
people at the beginning of the nineteoith century needed an ad-man 
to tell them what they wanted. 

It would be wrong to suggest that the economic ideas which once 
interpreted the world of mass poverty have made no adjustment to 
the world of affluence. There have been many adjustments, including 
some that have gone unrecognized or have been poorly understood. 
But there has also been a remarkable resistance. And the total altera- 
tion in underlying circumstances has not been squarely faced. As a 
result we are guided, in part, by ideas that are relevant to another 
world; and as a further result we do many things that arc unnecessary, 
sonic that are unwise, and a few that arc insane. We enhance substan- 
tially the risk of depression and thereby the threat to our affluence itself. 


The foregoing tells the purpose of this booL The first task is to see 
the way our economic attitudes are rooted in the poverty, inequality, 
and economic peril of the past. Then the partial and implicit accom- 
modation to affluence is examined. The next task is to consider the 
devices and arguments, some elaborate, some meretricious, some in a 
d^ee dangerous, by idiich, in vital matters, we have managed to 
maintain an association with the older ideas which stemmed ^m a 


world where nearly all were poor. For no one should suppose that 
there is anything convwiient or agreeable about the assumption of 
affluence. On die contrary, it threatens the prestige and position of 
many important people. And it exposes many of us to the even 
greater horror of new thought. We face here the greatest of vested 
interests, those of the mind. 

Finally, as we escape from the obsolete and contrived preoccupa- 
tions associated with the assumption of poverty, we arc able to sec for 
the first time the new tasks and opportunities that are before us. This 
is not as reassuring as it sounds. One of the best ways of avoiding 
necessary and even urgent tasks is to seem to be busily employed on 
things that are already done. 

Such is the piupose. But first there is some preparatory work. For 
we have not clung to obsolete and impalpable assumptions concern- 
ing our society purely as the result of obtuseness and ignorance. 
Powerful as these influences may be, they are not that strong. On the 
contrary, in matters of social discussion, there are active and per- 
vasive influences which bind us to the past and which, on occasion, 
even cause us to try to recover the moribund. We must first be 
aware of our captivity by these forces if we are later to engineer an 
escape. That is the task of the next chapter. 


No one will think this an angry book. Some may think it lacking in 
that beguiling modesty which is so much in fiishion in social com- 
moit. The reader will soon discover that I diink very litdc of certain 
of the central ideas of economics. But I do think a great deal of the 
men who originated these ideas. The shortcomings of economics are 
not original error but imcorrected obsolescence. The obsolescence 
has occurred because what is convenient has become sacrosanct. 
Anyone who attacks such ideas must seem to be a trifle selfrconfident 
and even aggressive. Yet I trust that judgments will not be too hasty. 
The man who makes his entry by leaning against an infirm door gets 
an unjustified reputation for violence. Something is to be attributed 
to the poor state of the door. 

Originality is something diat is easily exaggerated, especially by 



authors contemplating their o^ work. There are few thoughts in 
this essay, or so I would imagine, which have not occurred to other 
economists. The reaction of many will be to welcome the elaboration 
of ideas to which evidence has already brought diem. But diesc are 
also days in which even the mildly critical individual is likely to seem 
like a lion in contrast with the general mood. These are the days 
when men of all social disciplines and all poHdcal faiths seek die 
comfortable and the accepted; when the man of controversy is 
looked upon as a disturbing influence; whoi originality is taken to 
be a mark of instability; and when, in minor modificadon of die 
scriptural parable, the bland lead the bland. Those who esteem this 
world will not enjoy this essay. Perhaps they should return it to the 
shelf unread. For there are negative thoughts here, and they cannot 
but strike an uncouth note in the world of positive thinking. 


No student of social matters in these days can escape feeling how 
precarious is the existence of that with which he deah. Western man 
has escaped for the moment the poverty wliich was for so long his 
all-embracing fate. The uneardily light of a handful of nuclear 
explosions would signal his return to utter deprivation if, indeed, he 
survived at all. I venture to think that the ideas here ofiered bear on 
our chances for escape from this fate. Illusion is a comprehensive ill. 
The rich man who deludes himself into behaving Uke a mendicant 
may conserve his fortune although he will not be very happy. The 
affluent country which conducts its affliirs in accordance with rules of 
another and poorer age aho forgoes opportunities. And in mis- 
understanding itself it will, in any time of difficulty, implacably 
prescribe for itself the wrong remedies. This the reader will discover 
is, to a disturbing degree, our present tendency. 

Yet it would be a mistake to be too gravely depressed. The prob- 
lems of an affluent world, which does not understand itself, may be 
serious, and they can needlessly threaten the affluence itself. But they 
are not likely to be as serious as those of a poor world where the 
simple exigencies of poverty preclude the luxury of misunderstand- 
ing but where, also and alas, no solutions are to be had. 


The Concept of the Conventional Wisdom 

The first requirement for an understanding of contemporary eco- 
nomic and social life is a clear view of the relation between events 
and the ideas which interpret them. For each of these has a life of its 
own, and much as it may seem a contradiction in terms eacli is 
capable for a considerable period of pursumg an independent course. 

The reason is not difficult to discover. Economic, like other social 
life, does not conform to a simple and coherent pattern. On the con- 
trary, it often seems incoherent, inchoate, and intellectually frustrat- 
ing. But one must have an explanation or interpretation of economic 
behaviour. Neither man’s curiosity nor his inherent ego allows him 
to remain contentedly oblivious to anything that is so close to his 

Because economic and social phenomena arc so forbidding, or at 
least so seem, and because they yield few hard tests of what exists and 
what does not, diey afford to the individual a luxury not given by 
physical phenomena. Within a considerable range he is permitted to 
believe what he pleases. He may hold whatever view of this world he 
finds most agreeable or otherwise to his taste. 

As a consequence, in the interpretation of all social life there is a 
persistent and never-ending competition between what is relevant 
and what is merely acceptable. In this competition, while a strategic 
advantage lies with what exists, all tactical advantage is with die 
acceptable. Audiences of all kinds most applaud what they like best. 
And in social comment the test of audience approval, far more than 
the test of truth, comes to influence comment. The speaker or writer 
who addresses his audience with the proclaimed intent of telling the 




hard, shocking facts invariably goes on to expound what the 
audience most wants to hear. 

Just as truth ultimately serves to create a consensus, so in the short 
run does acceptability. Ideas come to be organized around what the 
community as a whole or particular audiences find acceptable. And 
as the laboratory worker devotes himself to discovering scientific 
verities, so the ghost writer and the public relations man concern 
themselves with identifying the acceptable. If their clients are 
rewarded with applause, these artisans arc qualified in their craft. If 
not they have failed. However, by sampling audience reaction in 
advance, or by pretesting speeches, articles, and other communica- 
tions, the risk of failure can now be greatly minimized. 

Numerous &ctors contribute to the acceptability of ideas. To a 
very large extent, of course, we associate truth with convenience— 
with what most closely accords widi self-interest and individual well- 
being or promises best to avoid awkward effort or imwelcome dislo- 
cation of life. We also find highly acceptable what contributes most 
to selfesteem. Speakers before the United States Chamber of Com- 
merce rarely denigrate the businessman as an economic force. Those 
who appear before the AFL-CIO arc prone to identify social progress 
with a strong trade union movement. But perhaps most important 
of all, people approve most of what diey best understand. As just 
noted, economic and social behaviour arc complex and mentally 
tiring. Therefore we adhere, as though to a raft, to diose ideas which 
represent our luiderstanding. Tins is a prime manifestation of vested 
interest. For a vested interest in understanding is more preciously 
guarded than any odier treasure. It is why men react, not infire- 
quendy with something akin to religious passion, to the defence of 
what they have so laboriously learned. Familiarity may breed con- 
tempt in some areas of human behaviour, but in the field of social 
ideas it is the touchstone of acceptability. 

Because familiarity is such an important test of acceptabiUty, the 
acceptable ideas have great stability. They arc liighly predictable. It 
will be convenient to have a name for the ideas which are esteemed 
at any time for their acceptability, and it should be a term that 
emphasizes this predictability. I shall refer to these ideas henceforth 
as the conventional wisdom. 




The conventional wisdom is not db.e property of any political group. 
On a great many modem social issues, as we shall see in the coune of 
this essay, the consensus is exceedingly broad. Nothing much divides 
those who are liberals by common political designation from those 
who are conservatives. The test of what is acceptable is much the 
same for both. On some questions, however, ideas must be accom- 
modated to the political preferences of the particular audience. The 
tendency to make this ai^ustment, eidier deliberately or more often 
unconsciously, is not greatly different for different political groups. 
The conservative is led by disposition, not unmixed with pecuniary 
self-interest, to adhere to the familiar and the established. These 
underlie his test of acceptability. But the liberal brings moral fervour 
and passion, even a sense of righteousness, to the ideas with which he 
is most familiar. While the ideas he cherishes are di&rent feom those 
of tlie conservative, he is not likely to be much less emphatic in 
making familiarity a test of acceptability. Deviatio in the form of 
originality is condemned as faithlessness or backsliding. A ‘good’ 
liberal or a ‘tried and true’ liberal or a ‘true blue’ liberal is one who 
is adequately predictable. This means diat he forswears any serious 
striving toward originality. In both die United States and Britain, 
in recent times, Uberals and their British coimterparts of the left have 
proclaimed themselves in search of new ideas. To proclaim the need 
for new ideas has served, in some measure, as a substitute for them. 

Thus we may, as necessary, speak of die conventional wbdom of 
conservatives or the conventional wisdom of liberals. 

The conventional wisdom is also articulated on aU levels of 
sophistication. At the highest levels of social science scholarship some 
novelty of formulation or statemrat is not resisted. On the contrary, 
considerable store is set by the device of putting an old truth in a 
new form, and minor heresies are much cherished. And the very 
vigour of minor debate makes it possible to exclude as irrelevant, and 
without seeming to be tuisdentific or parochial, any challenge to the 
feamework itself. Moreover, with time and aided by the debate, the 
accepted ideas become increasingly elaborate. They have a large 



literature, even a mystique. The defenders are able to say diat the 
challengers of the conventional wisdom have not mastered their 
intricacies. Indeed these ideas can be appreciated only by a stable, 
orthodox, and patient man— in brief, by someone who closely 
resembles the man of conventional wisdom. The conventional 
wisdom having been made more or less identical with sound scholar- 
ship, its position is virtually impregnable. The sceptic is disqualified 
by his very tendency to go brashly from the old to the new. Were 
he a sound scholar he would remain with the conventional wisdom. 

At the same time in the liigher levels of the conventional wisdom 
originality remains liighly acceptable in the abstract. Here again the 
conventional wisdom often makes vigorous advocacy of originality 
a substitute for originality itself. 


As noted, the hallmark of die conventional wisdom is acceptability. 
It has the approval of those to whom it is addressed. There are many 
reasons why people like to hear articulated that which they approve. 
It serves the ego: the individual has the satisfaction of knowing that 
other and more famous people share his conclusions. To hear what he 
believes is also a source of reassurance. The individual knows that he 
is supported in his thoughts— that he has not been left behind and 
alone. Further, to hear what one approves serves the evangelizing 
instinct. It means that odiers are also hearing and are dicreby in 
process of being persuaded. 

In some measure die articulation of die conventional wisdom is a 
religious rite. It is an act of affirmadon like reading aloud from die 
Scriptures or going to church. The business executive listening to a 
luncheon address on the virtues of free enterprise and the evils of 
Washington is already penuaded, and so are his fellow listeners, and 
all are secure in their convictions. Indeed, although a display of rapt 
attention is required, the executive may not feel it necessary to listen. 
But he does placate the gods by participating in the ritual. Having 
been present, maintained attention, and having applauded, he can 
depart feeling that the economic system is a little more secure. 
Scholars gather in scholuly assemblages to hear in elegant statement 



what all have heard before. Yet it is not a negligible rite, for its pur- 
pose is not to convey knowledge but to beatify learning and the 

With so extensive a demand, it follows that a very large part of 
our social comment— and nearly all that is well regarded— is devoted 
at any time to articulating the conventional wisdom. To some extent 
this has been professionalized. Individuals, most notably the great 
television and radio commentators, make a profession of knowing 
and saying with elegance and unction what Aeir audience will find 
most acceptable. But in general the articulation of the conventional 
wisdom is a prerogative of academic, public, or business position. 
Thus any individual, on being elected president of a college or imi- 
versity, automatically wins tlie right to enunciate the conventional 
wisdom should he choose to do so. It is one of the rewards of high 
academic rank, although such rank is also a reward for expounding 
the conventional wisdom at a properly sophisticated level. 

The high public official is expected, and indeed is to some extent 
required, to expound the conventional wisdom. His, in many re- 
spects, is the purest case. Before assuming office he ordinarily com- 
mands little attention. But on taking up his position he is immediately 
assumed to be gifted widi deep insights. He docs not, except in the 
rarest instances, write his own speeches or articles; and diese arc 
planned, drafted, and scrupulously examined to insure dieir accept- 
ability. The application of any offier test, e.g. their eficctivencss as a 
simple description of the economic or poHtical rcahty, would be 
regarded as eccentric in die extreme. 

Finally, the expounding of the conventional wisdom is the prero- 
gative of business success. The head of almost any large corporation 
—the United States Steel Corporation, General Motors, the Radio 
Corporation of America— is entided to do so. And he is privileged 
to speak not only on business policy and economics but also on the 
role of government in society, the foundations of foreign policy, 
and die nature of a liberal education. In recent years it has been urged 
that to expound the conventional wisdom is not only the privilege 
but also die obhgation of die businessman. ‘I am convinced that 
businessmen must write as well as speak, in order that we may bring 
to people everywhere the exciting and confident message of our 



faith in the free enteiprise way of life. . . . Wliat a cliangc would conic 
in this struggle for men’s minds if suddenly there could pour out 
from the world of American business a torrent of intelligent, for- 
ward-looking thinking.’^ 


The enemy of the conventional wisdom is not ideas but the march of 
events. As I have noted, the conventional wisdom accommodates 
itself not to the world that it is meant to interpret, but to the audi- 
ence’s view of the world. Since die latter remains with the comfort- 
able and the familiar, while the world moves on, the conventional 
wisdom is always in danger of obsolescence. This is not immediately 
fatal. The fatal blow to the conventional wisdom comes when the 
conventional ideas fail signally to deal widi some contingency to 
which obsolescence has made them palpably inapplicable. This, 
sooner or later, must be the fate of ideas which have lost their relation 
to die world. At this stage the irrelevance will often be dramatized 
by some individual. To him will accrue the credit for overthrowing 
the conventional wisdom and for installing the new ideas. In £ict, he 
will have only crystallized in words what the events have made clear, 
although tins function is not a minor one. Meanwhile, like the Old 
Guard, the conventional wisdom dies but does not surrender. Society 
with intransigent cruelty may transfer its exponrats from the cate- 
gory of wise man to diat of old fogy or even stuifrd shirt. 

This sequence can be illustrated from scores of examples, ancient 
and modem. For decades prior to 1776 men had been catching the 
vision of die liberal state. Traders and merchants in England and in 
the adjacent Low Countries, and in the American colonics, had 
already learned that they were served best by a minimum of govern- 
ment restriction rather than, as in the conventional wisdom, by a 
maximum of government guidance and protection. It had become 
plain, in turn, that liberal trade and commerce, not the accumulation 
of bullion, as the conventional wisdom held, was the modern source 
of national power. Men of irresponsible originaUty had made the 

^C 3 atence B. Randall, A Creed for Free Enterprise (Boston, Atlantic-Little, 
Brown, 195a). pp- 3 . 5 - 


point. Voltaire had observed that *It is only because the English have 
become merchiuits and traders diat London has surpassed Paris in 
extent and in die number of its citizens; that the English can place 
200 warships on the sea and subsidize allies.’^ These views were 
finally crystallized by Adam Smith in the year of American indepen- 
dence. The Wealth of Nations, however, continued to be viewed with 
discontent and alarm by the men of the older wisdom. In the funeral 
elegy for Alexander Hamilton in 1804, James Kent complimented 
his deceased fiiaid on having resisted the ‘fuzzy philosophy’ of 
Smidi. For another generation or more in all western countries there 
would be solemn warnings that the notion of a liberal society was a 
reckless idea. 

Through the nineteenth century, Uberalism in its classical meaning 
having become the conventional wisdom, there were solemn warn- 
ings of the irreparable damage that would be done by Factory Acts, 
trade unions, social insurance, and other social legislation. Liberalism 
was a fabric which could not be ravelled without being rent. Yet the 
desire for protection and security and some measure of equality in 
bargaining power would not stay down. In the end it became a fact 
with which the conventional wisdom could not deal. The Webbs, 
Lloyd George, LaFollette, Roosevelt, Beveridge, and others crystal- 
lized the acceptance of the new fact. The result is what we call die 
welfare state. The conventional wisdom now holds that these 
measures softened and civilized capitalism and made it touble. 
There have never ceased to be warnings that the break with classical 
liberalism was Eital. 

Another interesting instance of the impact of circumstance on the 
conventional wisdom was that of the balanced bucket in times of 
depression. Almost from the beginning of organized government the 
balanced budget or its equivalent has been the sine qua non of sound 
and sensible management of the public purse. The spendthrift ten- 
dencies of princes and r^ublics alike were curbed by the rule that 
they must unfailingly take in as much money as diey paid out. The 
consequences of violating this rule had always been unhappy in 
the long run and not in&equoidy in the short. Andoidy it was 

^ 'Tenth Philosophical Letter.’ Quoted by Henri S^, Modem Capitalism (New 
York, Adelphi, 1928), p. 87. 



the practice of states to cover the deficit by clipping or debasing the 
coins and spending the metal so saved. The result invariably was to 
raise prices and lower national self-esteem. In modem times the issue 
of paper money or the obtaining of soft loans fi:om banks had led to 
the same results. As a result, die conventional wisdom had never 
emphasized anything more strongly dian the importance of an 
annually balanced budget. 

But meanwhile the underlying reality had gradually changed. The 
rule requiring a balanced budget was designed for governments diat 
were inherendy or recurrendy irresponsible on fiscal matters. Until 
the last century there had been no other. Then in the United States, 
England and the Britisli Commonwealth, and elsewhere govern- 
ments began to calculate the fiscal consequences of their actions. 
Safety no longer depended on confining them within arbitrary rules. 

At about the same time, dierc appeared the phenomenon of the 
truly devastating depression. In such a depression men, plant, and 
materials were unemployed en masse; die extra demand from the 
extra spending induced by the deficit— the counterpart of the extra 
metal made available firom the clipped coinage— did not raise prices 
uniquely. Rather it mosdy returned idle men and plant to work. The 
effect, as it were, was horizontally on production rather than verti- 
cally on prices. And such price increases as did occur were far from 
being an immitigated misfortune; on the contrary’, they retrieved a 
previous, painful decline. 

The conventional wisdom continued to emphasize the balanced 
budget. Audiences continued to respond to the warnings of the 
disaster which would befall were this rule not respected. The shatter- 
ing circumstance was the Great Depression. This led to a severe 
reduction in the revenues of the federal government; it also brought 
increased pressure for a variety of reUef and welfare expenditures. 
A balanced budget meant increasing tax rates and reducing public 
expenditure. Viewed in retrospect, it would be hard to imagine a 
better design for reducing both the private and the public demand for 
goods, aggravating deflation, increasing imemployment, and adding 
to the general sufiering. In the conventional wisdom, none the less, 
the balanced btidget remained of paramount importance. President 
Hoover in die early thirties called it an ‘absolute necessity’, ‘the most 


essential factor to economic recovery’, ‘the imperative and iimnedi- 
ate step’, ‘indispensable’, ‘the first necessity of the Nation’, and ‘the 
foundation of all public and private financial stabiUty’.^ Economists 
and professional observers of public affairs agreed almost without 
exception. Almost everyone called upon for advice in the early years 
of the depression was impelled by die conventional wisdom to offer 
proposals designed to make things worse. The consensus embraced 
both hberals and conservatives. The Roosevelt Administration was 
also elected in 1932 with a strong commitment to reduced expendi- 
tures and a balanced budget. In his acceptance speech in 1932 Roose- 
velt said, ‘Revenue must cover expenditures by one means or 
another. Any government, like any family, can for a year spendalitdc 
more dian it earns. But you and I know that a continuation of that 
habit means the poorhousc.’ One of the early acts of his Administra- 
tion was an economy drive wliich included a horizontal slash in 
pubhc pay. Mr. Lewis W. Douglas, through a distinguished hfe a 
notable exemplar of the conventional wisdom, made the quest for a 
balanced budget into a personal crusade and ultimately broke with 
die Administration on the issue. 

In fact, circumstances had already triumphed over the conven- 
tional wisdom. By die second year of the Hoover Administration the 
budget was irretrievably out of balance. In die fiscal year ending in 
1932, receipts were much less than half of spending. The budget was 
never balanced during die depression. But not until 1936 did both the 
necessities and advantages of this course begin to triumph in the field 
of ideas. In that year, Jolui Maynard Keynes launched his formal 
assault in The General llieory of Employment, Interest and Money. 
Thereafter the conventional insistence on the balanced budget under 
all circumstances and at all levels of economic activity was in retreat. 
Keynes, as we shall see presendy, was also on his way to constructing 
a new body of conventional wisdom, die obsolescence of some parts 
of whicli, in its turn, is now well advanced. 

^ Arthur M. Schlesingcr, Jr., TIk Crisis of the Old Order (Boston, Houghton 
Mifflin, 1956), p. 232. 




In the following pages there will be frequent occasion to advert to the 
conventional wisdom— to the structure of ideas that is based on 
acceptability— and to those who articulate it. These references must 
not be diought to have a wholly invidious connotation. (The warn- 
ing is necessary because, as noted, we set great ostensible store by 
intellectual innovation though in fact we resist it. Hence, though we 
value the rigorous adherence to conventional ideas, we never acclaim 
it.) Few men are unuseful and the man of conventional wisdom is 
not. Every society must be protected from a too facile flow of 
thought. In the field of social comment a great stream of intellectual 
novelties, if all were taken seriously, would be disastrous. Men would 
be swayed to diis action or that; economic and political life would be 
erratic and rudderless. In the Communist countries stabiUty of ideas 
and social purpose is achieved by formal adherence to an officially 
proclaimed doctrine. In our society a similar stability is enforced far 
more informally by the conventional wisdom. Ideas need to be tested 
by their ability, in combination with events, to overcome inertia and 
resistance. This inertia and resistance the conventional wisdom pro- 

Nor is it to be supposed that die man of conventional wisdom is an 
object of pity. Apart firom his socially useful role, he has come to 
good terms with life. He can think ofhimsclf with justice as socially 
elect, for society in fact accords him the applause which his ideas are 
so arranged as to evoke. Secure in this applause he is well armed 
against the annoyance of dissent. His bargain is to exchange a strong 
and even lofty position in the present for a weak one in the future. 
In the present he is questioned with respect, if not at great length, by 
Congressional Committees; he walks near the head of the academic 
processions; he appears on symposia; he is a respected figure at the 
American Assembly; he is hailed at testimonial banquets. He risks 
being devastated by hostile events. But by then he may be dead. Only 
posterity is unkind to the man of conventional wisdom, and all 
posterity does is bury him in a blanket of neglect. However, some- 
what more serious issues are at stake. 



No society seems ever to have succumbed to boredom. Man has 
developed an obvious capacity for surviving die pompous reiteration 
of the commonplace. The conventional wisdom protects the con- 
tinuity in social thought and action; in the immediately following 
chapters wc shall see how great this continuity is. But dierc arc also 
grave drawbacks and even dangers in a system of diought which by 
its very nature and design avoids accommodation to circumstances 
until change is dramatically forced upon it. In large areas of economic 
adairs the marcli of events— above all, the increase in our wealth and 
popular well-being— has again left the conventional wisdom sadly 
obsolete. It may have become inimical to our happiness. It has come 
to have a bearing on the larger questions of civilized survival. So 
while it would be mudi more pleasant (and also vastly more profit- 
able) to articulate the conventional wisdom, this book involves the 
normally unfruitful effort of an attack upon it. I am not wholly 
barren of hope, for circumstances have been dealing die conventional 
wisdom a new series of heavy blows. It is only after such damage has 
been done, as we have seen, that ideas have their opportunity. 

Keynes, in his most famous observation, noted that wc arc ruled by 
ideas and by very little else. In die immediate sense this is true. And 
he was right in attributing importance to ideas as opposed to the 
simple influence of pecuniary vested interest. But the rule of ideas is 
only powerful in a world that does not diange. Ideas are inherently 
conservative. They yield not to the attack of other ideas but to the 
massive onslaught of circumstance widi which they cannot contend. 


Economics and the Tradition of Despair 

Economics, not entirely by accident, became a subject of serious 
study at an important turning-point in tlie history of western man. 
This was when the wealth of national communities began, for the 
first time, to show a steady and persistent improvement. This change, 
which in advanced countries like England and Holland came some 
time in the eightecntli century, must be counted one of die momen- 
tous events in die history of the world. ‘From the earliest times of 
which we have record— back, say, to two thousand years before 
Christ— down to the begimiing of die cighteendi century, there was 
no very great change in the standard of hAdng of the average man 
living in die civilized centres of the earth. Ups and downs certainly. 
Visitations of plague, famine and war. Golden intervals. But no pro- 
gressive violent change.’^ 

Some of die intervals had been extended. For something over a 
century in medieval England— from perhaps 1380 to 1510— workers 
or at any rate skilled artisans seem to have enjoyed a period of con- 
siderable prosperity. But as always before, the good times came to an 
end; by the close of the sixteenth century the purchasing power of an 
artisan’s wage had fallen by more than half. It remained low through 
the disorders of the Civil War, and progress was uncertain for a long 
time thereafter. Then early in die last century diese wages began the 
rise which, with slight interruption, has since continued.® 

M. Keynes, Essays in Persuasion. Economic Possibilities for Our Grand- 
children. (London, Macmillan, 1931), p. 360. 

® E. H. Phelps Brown and Sheila V. Hopkins, ‘ Seven Centuries of the Prices of 
Consumables, Compared widi Builders* Wage Rates.* Economica, New Series; 
vol. XXni, no. 92 (November 1956). 




There were reasons for the age-old stagnation as there were also 
reasons for the change. The productivity of an economy based on 
agriculture and household industry had inherent limits. And before 
the appearance of the national state any surplus diat might be accu- 
mulated was subject to the spoliation of diverse anned marauders 
and might, in fact, attract their attention. 

In the latter part of the eighteenth century the factory began to 
replace the household at an accelerating rate as the centre of produc- 
tive activity. Output per man-hour was no longer limited by the 
simple technology and the small capital of the household and by the 
need to rely mostly on human or animal power. The new national 
states had begun to make effective die guarantee of internal order. 
Armies would still cross national frontiers and with considerable 
capacity for doing damage where they fought and trod. But the 
economic consequences of national armies in the age of nationalism 
have been almost infinitely small as compared with the damage 
wrought by feudal, marauding, or crusading armies in die centuries 
before. Within a few years following die two World Wars the 
standard of living of Western European countries, even those that 
were defeated and devastated, was higher than ever before. The eco- 
nomic life of the Middle East never recovered from the imaginative 
and highly co-ordinated destruction, pillage, and massacre of Genghis 
Khan. In contrast with recent experience, Germany required a hun- 
dred years to recoup the destruction and disorganization of the 
Thirty Years War. However, a future national war might well bring 
destruction abreast of the ancient art. 

But it would have been surprising if, as the conditions of life gradu- 
ally improved in the eighteenth and nineteentii centuries, man had 
quickly forsaken the lessons of all the preceding ages and supposed 
this improvement to be permanent. This was all the more impro- 
bable for, in the early years of the hidustrial Revolution, the rewards 
of increased efficiency were distributed very unequally. It was the 
wealth of the new entrepreneun, not tiiat of their workmen, which 
was everywhere celebrated. Those who owned the new factories, or 
the raw materials or railways or banks that served them, lived in 
mansions by whidi the century is still marked. Hieir workers lived 
in dark and noisome hovek, crowded on dirty and unpaved streets 


along which naissionaries and social reformers ventured with a con- 
siderable sense of their own courage. And in the £u:tories themselves 
tlie old and the very young worked &om early to late and for a 
pittance. In England in the first half of the nineteenth century both 
total production and output per person were rising rapidly. The 
number of people of means was increasing. So, too, as the mid- 
century approached, were real wages. But the improvement in the 
position of the masses was far less evident than the increase in indus- 
trial and mercantile wealdi. If the poor were becoming less poor, this 
change was slight as compared with the growing contrast between 
tlie rich and the poor. 

Economic ideas began to take their modem form in the late 
eighteenth and early nineteentli centuries. It was against tliis back- 
ground of centuries-old stagnation relieved now by increasing 
wealth, but wealth not of the many but the few, that they were first 
worked out and offered. Economists would indeed have been 
indifferent to bodi history and environment had they not taken the 
privation and economic desolation of the masses for granted. In 
economics misfortune and failure were normal. Success, at least for 
more than the favoured few, was what had to be explained. Enduring 
success was at odds widi all history and could not be expected. This 
was the legacy of circumstances to ideas. As we shall see, it has 
enjoyed a remarkable vitality. 


In the history of economic thought Adam Smith (1723-90), the first 
great figure in the central economic tradition,^ is counted a hopeful 
figure. In an important sense he was. His vision was of an advancing 
national community, not a stagnant or declining one. His tide An 
Inquiry into the Nature and Causes of the Wealth of Nations had an 

^ I have used the phrase ‘central tradition’ to denote the main current of ideas in 
descent from Smith. The more common reference to the ‘classical tradition’ is ruled 
out by a difference of opinion, in my opinion a rather futile one, as to whether 
classical economics should or should not be considered to have ended with John 
Stuart Mill and J. £. Caitnes. Another possible reference is to the orthodox tradi- 
tion. But this, by implication, excludes those like Keynes who, thoi^ working in 
the same current of ideas, have taken sharp issue with accepted contusions. 


obvious overtone of opulence and well-being. He offered an all but 
certain formula for economic progress. This was the liberal economic 
society in which regulation was by competition and the market and 
not by the state, and in which each man, dirown on his own resources, 
laboured effectively for the enrichment of the society. 

But it was of aggregate wealth that Smith spoke. He had little hope 
that the distribution between merchants, manufiicturers, and land- 
lords on the one hand, and the working masses on the other, would 
be such as much to benefit the latter. Smith regarded this distribution 
as depending in the first instance on relative bargaining strength. 
And he did not bcheve it difficult ‘to foresee which of die two parties 
must upon all ordinary occasions luve the advantage in die dispute’. 
In an admirably succinct comment on the balance of cighteendi- 
century economic power he added: ‘We have no acts of ParUament 
against combining to lower die price of work; but many against 
combining to raise it.’* So in the normal course of events die income 
of the working masses would be pressed down and down. There was 
a floor below which they would not fall. ‘A man must always live by 
his work, and his wages must at least be sufficient to maintain him. 
They must even upon most occasions be somewlut more; otherwise 
it would be impossible for him to bring up a family, and the race of 
such workmen could not last beyond die first generation.’ ‘ 

But this obviously was not much. On die contrary, aldiougli 
Adam Smidi is rarely identified with the idea, this was one of the 
beginnings of perhaps die most influential and certainly the most 
despairing dictum in the history of social comment, the notion that 
the income of the masses of die people— all who in one way or 
another worked for a living and whether in industry or agriculture 
—could not for very long rise very far above the minimum level 
necessary for the survival of the race. It is the immortal iron law 
which, as stiffened by Ricardo and refiishioned by Marx, became the 
chief weapon in die eventual ideological assault on capitalism. 

Smith was not categorical about die iron law— he was categorical 
about almost nothing, and ever since economists have always been at 

* Wealth of Nations, ch. VIII. (There are so many editions of this £unous work 
that it seems idle to cite the pages of the particular edition one happens to use.) 




their best when they adhered to his example. Thus he conceded that 
a scarcity of workers might keep wages above the subsistence level 
for an indefinite time. Under conditions of rapid economic growth 
wages would also rise. Growth was much more important than 
wealth per se in its effect on wages. ‘It is not the actual greatness of 
national wealth, but its continual increase, which occasions a rise in 
the wages of labour. . . . England is certainly, in the present times, a 
much richer country than any part of North America. The wages of 
labour, however, are much higher in North America than in any 
part of England.’* 


Smith’s two great successors in the central tradition were David 
Ricardo (1772-1823) and Tliomas Robert Malthus (1766-1834). 
With Adam Smith they were the founding trinity of economics, at 
least as tlic subject is known in the English-speaking countries. As the 
man who first gave economics its modem structure— who looked at 
the factors determining prices, rents, wages, and profits with a sense 
of system tliat has served economists ever since— Ricardo has a 
special claim to have bent the twig. Marxians and non-Marxians are 
equally in his debt. 

With Ricardo and Malthus the notion of massive privation and 
great inequality became a basic premise. These conclusions were 
never wholly unqualified. But the qualifications were only quali- 
fications. It was to Ricardo and Malthus that Carlyle alluded when 
he spoke in 1850 of the ‘Respectable Professors of the Dismal Science’ 
and gave to economics a name that it has never quite escaped because 
it was never quite undeserved. 

Of Malthus it is necessary to say only a word. Through the nine- 
teenth century and to our own day he has been intimately and all but 
exclusively identified with his Essay on Population. Though he had 
odier and important things to say on economics which have been the 
subject of a latter-day rediscovery, it is for his views on population 
that he will be always known. 

* Ibid. Smitli observes that this was written in 1773 before ‘the commencement 
of the late disturbances’, meaning the American Revolution. 

economics and the tradition of despair 21 

The number of people who can live in the world is obviously 
limited by the number that can be fed. Any increase in the supply of 
food would bring, in Malthus’ view, an increase in the number of 
people to consume it. Nothing but stark need limits the numbers 
who are propagated and who endure. As a result, men will for ever 
live on the verge of starvation. In the latter editions of the Essay 
Malthus hedged somewhat; the increase in response to a surplus over 
subsistence might be tempered by ‘moral restraint’ and also, some- 
what more ambiguously, by ‘vice’. In other words, people might 
indefinitely protect their standard of living at a level above sub- 
sistence, and this would become aU the more likely once both 
restraint and vice were abetted by eficctive contraceptive techniques. 
But as also with Ricardo, Malthus’ qualifications were lost in the 
sweep of his central proposition. This was the inevitability of mass 
poverty. There was also the considerable fact that for a large part of 
the world, the central proposition was vahd and the quahfications 
were unimportant. So it was and so it remains in much of Asia. 
Malthus, it may be noted, was professor of political economy in 
Haileybury College, an institution maintained by the East India 
Company for training its servants who would serve in India. 

Since most men had always been poor, it is hardly surprising that 
Malthus was on the whole unperturbed by his conclusions and that 
he did not feel called upon to propose any remedy. (He confined 
himself to urging the postponement of marriage and to recommend- 
ing that there be incorporated into the marriage service a warning 
that the husband and not the state would be responsible for the chil- 
dren of the union so that if these were excessive die parents could 
expect to be punished by want.) ‘The note of gloom and pessimism 
which disting uis hed so much of the economic doctrine of the nine- 
teendi century is in no small measure the legacy of Maldius.’^ 


Both Adam Smith and Malthus had an instinct for national aggre- 
gates— for the forces which acted to enrich the nation. While Malthus 

* Alexander Gray, The Develoyment of Economic Doctrine (London, Longmans 
Green, 1931), p. 163. 



was concerned with sliowing how increased national wealdi might 
be used up in the explosive impulse to procreate, neither was cen- 
trally concerned with how difharent individuals and classes might 
share in what the economy produced. This to David Ricardo was of 
primary interest. What were the laws which governed the distri- 
bution of product or income among the landlords, entrepreneurs, 
and workers who had claim to it? ‘Political Economy you think is an 
inquiry into tlic nature and causes of wealth— I think it should rather 
be called an inquiry into the laws which determine the division of the 
produce of industry amongst the classes who concur in its forma- 
tion.’* These laws as Ricardo formulated them worked with fero- 
cious inequality. 

Like Malthus, Ricardo regarded population as a dependent vari- 
able— it ‘regulates itself by the funds which are to employ it, and 
therefore always increases or diminishes with the increase or diminu- 
tion of capital’.^ Advancing wealth and productivity thus bring 
more people; but dicy do not bring more land firom which to feed 
these people. As a result those who own land are able to command an 
ever greater return, given its quality, for what is an increasingly 
scarce resource. Meanwhile, in Ricardo’s view, profits and wages 
were in flat conflict for the rest of the product. An increase in profits, 
other things being equal, meant a reduction in wages; an increase in 
wages must always come out of profits. ‘Every rise of profits’ on the 
other hand ‘is favourable to the accumulation of capital, and to the 
further increase of population, and therefore would, in all probabiUty, 
ultimately lead to an increase of rent.’* The effect of these compact 
relationships will be clear. If the country is to have increasing capital 
and product, profits must be good. But then as product expands the 
population will increase. The food requirements of the population 
will press on the available land supply and force up rents to the 
advantage of the landowner. In other words, capitaHsts must prosper 
if there is to be progress and landlords cannot help reaping its fruits. 
The children of this inescapable misfortune are the people at large. 

1 Letter to Malthus, October 9, 1820. In The Works and Correspondence of Datnd 
Ricardo, ed. by Piero Sra& Cambridge University Press), vol. VIII, p. 278. These 
volumes are hcnoefordi cited as Works and Correspondence. 

• Ibid.. voL I, p. 78. • Ibid., p. 41 1. 



Ricardo summarized that prospect in, perhaps, the most quoted 
passage in economic literature: ‘Labour, like all odicr things which 
arc purchased and sold, and which may be increased or diminished in 
quantity, has its natural and its market price. The natural price of 
labour is that price which is necessary to enable the labourers, one 
with another, to subsist and perpetuate their race, widiout either 
increase or diminution.’^ 

This was the iron law of wages. As with Smith (and Malthus on 
population) Ricardo followed the proposition with qualifications. In 
an ‘improving’ society the market wage might be a^vc the natural 
wage for an indefinite period and were Ricardo still alive he could 
show with httle difficulty that the conditions necessary for die rule of 
the iron law have been in abeyance ever since the nineteendi day of 
April 1817, when On the Principles of Political Economy and Taxation 
was publislicd. But although the truth rarely overtakes falsehood, it 
has winged feet as compared with a qualification in pursuit of a bold 
proposition. The iron law, in its uncompromised clarity, became part 
of the intellectual capital of the world. 

Moreover, as with Malthus, nothing could be done about it. 
Ricardo brought his analysis to a close with the unbending observa- 
tion that ‘These then are die laws by which wages are regulated, and 
by which the happiness [a word to be duly noted] of far the greatest 
part of every community is governed. Like all other contracts, wages 
should be left to the fair and free competition of the market, and 
should never be controlled by the interference of the legislature.’* 
Nor may anyone be blamed. On a number of occasions Ricardo 
complained that Malthus was unfiurly accusing him of being hostile 
to landlords— ‘one would suppose firom his language tiiat I con- 
sidered them enemies of the state’.® The landlords were merely the 
passive and natural beneficiaries of their great good fortune. This 
was die nature of things. Such was the Ricardian legacy. 

There were many contradictions and ambiguities in Adam Smith. 
There were also flaws in die Ricardian logic as it applied to die 
Ricardian world. His treatment of capital and profits left much to be 
desired. And he preoccupied himself with land at almost the point in 

* Works and Correspondence, p. 93. * Ibid., p. 105. 

• Ibid., vol. II, p. 117. 



history wlieii, because of the opening of a new world, it had begiui 
to lose its ancient preoccupying importance. Yet it is hard to think 
that economists ever came much closer to interpreting the world in 
which they lived than did Smith, Ricardo, and Malthus. None was 
committed to preconceived doctrine. They had broken decisively 
with the conventional wisdom of the traditionalist and mercantilist 
society. They had no pubHc opinion to appease. The result was a 
formidable interpretation of, and prescription for, the world as they 
found it. 

In a world tliat had for so long been so poor nothing was so im- 
portant as to win an increase in wealth. The prescription— to free 
men from the restraints and protection of feudal and mercantilist 
society and put them on their own— was sound, for it was already 
proving itself. Tliis was not a compassionate world. Many suflercd 
and many were destroyed under the harsh and unpredictable rule of 
competition and the market. But many had always perished for one 
reason or another. Now some were flourishing. This was what 
counted. One looked not at the peril and misfortune, for there had 
always been peril and misfortune, but at the opportunity. In any case 
nothing could be done about the inequaUty, for it was not rooted in 
mutable social institutions but in biology. This was fortunate, for the 
state was excluded from intervention by its prior commitment to 
freedom of enterprise. 

Remarkably httle that concerned contemporary economic society 
was left unbuttoned. It is hardly surprising that a system, seemingly 
so complete and practicable and so subject to test against the reaUties 
of the world, made an indehble dent on men’s minds. 


For thirty years following die death of Ricardo the development of 
economics continued firmly in the tradition he had established. 
Lesser men together with die conscientious and immeasurably learned 
John Stuart Mill refined, developed, and organized the ideas. Their 
thoughts remained centred on the Hberal economic society— that in 
which economic life was r^;ulatcd by the market and not by the 
state. On the Continent men did talk about socialism but in England 


and in die Anglo-Saxon tradition they took the market very nearly 
for granted. 

Then at mid-century the economic ideas in the descent from 
Ricardo came to the great divide. The central tradition continued in 
its course. It continued to provide the skeletal framework for econo- 
mic ideas down to our own day. In so doing it gave them system and 
continuity and went far to make economic life comprehensible. But 
now, branching off to the left but with a common debt to Ricardo, 
was the revolutionary tradition of Karl Marx. Henceforth, in shaping 
attitudes toward economic life, it was both a massive competitor of 
and a powerful influence on, die central tradidon. 

The purpose of these chapters is not to trace the evolution of the 
individual ideas. That is the task of other volumes and even more of 
other authors. Rather it is to see what economics assumed in its 
origins about the ordinary individual and his fate. As between the 
early Ricardian world and that of Marx, diere was in this respect no 
difference. For both the prospect, given the uninterrupted working 
out of the underlying forces, combined peril with hopelessness. The 
difierence was that Ricardo and his immediate followers expected die 
system to survive and Marx did not. But for Ricardo the system 
survived not because it served the ordinary man. Obviously it did 
not. It survived only because there was no evident alternative and 
certainly none that was better. Any effort to modify it made it less 

In time the case for the continuation of die liberal economic society 
changed. Its superior efficiency was still argued. But by almost im- 
perceptible degrees it came to be argued, or at least implied, that it 
was also tolerable. It provided a reasonable prospect for the ordinary 
man and something better for the individual of exceptional capa- 
cities. This was widely taken as ushering in an age of optimism on 
man’s material prospects. On closer examination, to which we now 
turn, we shall see how mucli of the natal pessimism survive. 



The Uncertain Reassurance 

As it was left by Malthas and Ricardo the economic prospect for the 
ordinary individual was remarkably dull. His normal expectation 
was to live on the edge of starvation. Anything better was abnormal. 
Progress would enhance the wealth of those who, generally speaking, 
were already rich but not of die masses. Nodiing could be done 
about it. And these are more dian the casual conclusions of two men. 
They have claim to be considered die propositions on which modem 
economic thought was founded. 

In the usual view, from the middle of the nineteenth century on 
economists became more sanguine, even optimistic. England was the 
centre of the influential discussion. She was in her great era of com- 
mercial and industrial expansion. Real wages were rising. There was 
a clear and apparently enduring margin over mere subsistence. In 
Western Europe and America the Malthusian horror was also reced- 
ing, although it was still possible to suppose that this was die result 
of the fortuitous opening, all in a few decades, of the North Ameri- 
can prairies and plains, die pampas and the veld, the New Zealand 
pastures and the endless AustraUan outback. These could rescue the 
world once but not twice. When population had caught up with 
these new areas population would again press upon the food supply. 
Only in the present century, as the relation between real income and 
the rate of population increase has become increasingly unreliable, 
has there ceased to be fear that the ghost of Malthus might return to 
haunt western countries as it still roams the villages of Asia. 

In the more specific realm of economic theory, the latter half of the 
last century saw the rejection of the iron law. For a time the income 




of those who worked was thought to be limited by the amount of 
working capital somehow dedicated to the employment of labour in 
agriculture and industry. This was the famous wages fund which 
John Stuart Mill fint espoused and then rejected. Doubts then began 
to arise as to whether a single generalization on wages would suffice. 
Education and special skiUs came to be regarded as having costs of 
production that had to be paid for. Special abilities, it was concluded, 
would, like land, command a rent. Finally, by the end of the century, 
die worker’s return— bearing always in mind that by this is meant 
the income of the masses of the people— was being related to the 
value of his marginal product; i.e., he received what he added to the 
value of his employer’s product. Were he paid less than the value of 
his contribution it would be open to a competitor to offer him more, 
for in a competitive world there would be other employers whose 
product he could increase by more than liis wage. As a result— a 
result that might be greatly aided by effective bargaining by a union 
—wages would tend to be equated with the marginal productivity. 
This might be high if workers were scarce and highly productive and 
low if they were redundant and incompetent. But obviously diis 
was a long distance from the iron law, and the break became com- 
plete when it no longer seemed certain that well-being brought a 
self-liquidating flood of cliildren. 

With the dcvelopmait of the marginal productivity theory, the 
efibrt to construct a general tlicory of remuneration came pretty 
much to an end. Having satisfied themselves, as it were, that poverty 
for those who toiled was not the natural order of things, economists 
turned to other questions. Most recent work has concerned itself with 
unions and with the bargaining power which the prescient Adam 
Smith identified as die real problem. 

Yet it would be a great mistake to suppose that economics in the 
central tradition had escaped from its history. For one thing the 
notion of an upper Umit on the incomes of the masses of the people 
died very slowly: perhaps dicse incomes might not be pressed 
remorselessly down to die floor but they would still be under a 
ceiling. At Ae end of die last century Alfred Marshall (1842-1924), 
whose Principles educated Ae older members of the present genera- 
tion of economists, was still impelled to argue that if ’economic 



conditions of the cotmtry remain stationary sufficiently long . . . both 
machines and human beings would earn generally an amount that 
corresponded fairly with their cost of rearing and traming, conven- 
tional necessaries as well as those things which arc striedy necessary 
being reckoned for’.^ In other words, wages would cover die cost of 
producing die children, as these costs are conventionally reckoned, 
and no more. As with Ricardo the tendency was still to a minimum. 
In die United States in the early decades of the present century, the 
leading figure in the central tradition and the most respected teacher 
of his time was Professor Frank W. Taussig of Harvard. His sum- 
mary of the prospect for the ordinary individual which he repub- 
lished as late as 1936 was as follows: ‘The usual rate of wages for 
ordinary labour in die United States was during the first decade of 
the twentieth century not far firom $800 a year. This is much better 
dian savagery . . . [but] ... If no more is in prospect, the institution 
of private property stands not only on the defensive but in a position 
that cannot long be defended. Yet something better is by no means 
incompatible with the system.’* He was not yet prepared to assert 
categorically that somctliing better was wholly compatible with the 


There remained down to our own time, in short, the lingering con- 
viction that while economic life for the masses might not be intoler- 
able it would still not be very good. In this degree Ricardo still 
ruled. He ruled in another respect. For it was also believed that if 
men were poor not much could be done about it. By skill, diligence, 
and training the individual could raise his marginal product and 
hence the wage he could claim. As the most obvious avenue of escape 
for die individual firom poverty, this became a factor of great impor- 
tance in shaping economic attitudes. There will be occasion to return 
to it later. But if a worker’s wage was low it was because his marginal 
product had remained low. To raise his wage without raising his 

^ Alfred Manhall, Principles of Economics (8th cd.; London, Macmillan, 1927), 
p. J77. The highly infrlicitous expression is exceptional. 

* F. W. Taussig, Principles of Economia (3td eA; New York, Macmillan, I9j6), 
p. 223. The fint edition was published in 1911. 


marginal productivity would be to put his pay above his contribu- 
tion. This would make it profitable for his employer to fire hitri 
Thus the alternative to low wages was unemployment. Nor is this 
an antique view. ‘Each worker receives the value of his marginal 
product under competition. If a minimum wage is effective, it must 
therefore have one of two effects: first, workers whose services are 
worth less than the minimum wage are discharged (and thus forced 
into unregulated fields of employment or into unemployment . . .) 
or, second, the productivity of low-efficiency workers is increased.’* 
The second likelihood was discarded. The legislation was thus shown 
to be damaging to those for whom it was designed. Hiis analysis was 
offered by an able and young scholar in 1946. 

The marginal productivity theory, moreover, provided no re- 
assurance on the other malign tmdency of the Ricardian system 
which was for the rich to become very rich indeed. Capital like 
labour was compensated at a rate corresponding to its marginal pro- 
duct. However appropriate and just this arrangement of things miglit 
be, it followed that if the capital were owned in large amounts by 
few individuals it would be to these that its income would accrue. The 
resulting inequality might be very great. Observation suggested 
that this would be the case. In the halfcentury following the Civil 
War in the United States, men accumulated fortunes of incredible 
size. Between 1892 and 1899 Rockefeller’s penonal dividends from 
Standard Oil amoimted to between $30,000,000 and $40,000,000. In 
iSKX} Andrew Carnegie had an income fiom his steel companies of 
$23,000,000.* These revenues were not subject to tax, and the dollar 
then was worth rather more than now. In addition to oil and steel, 
railroads, real estate, copper, banking, and odier pursuits returned 
vast rewards. While some of it represented a return on capital, some 
could readily be rdated to a strategic grip on ‘original and (not per- 
haps entirely) indestructible powen of the soil’ and of the subsoil 
from which, precisely, Ricardo expected vast wealth would be 

There was imeasiness in the central tradition over this inequality. 

* G. J. Stigler, 'Tlie Eooaoiiiia of Mininuun Wage Legislation’, Amerkan 
Economk Review, vol. XXXVI, no. 3 (June 1946), p. 358. 

* New Yoik Timet, Mardi 4, 1957. 


The inheritance of wealth was a special source of discomfort. Perhaps 
one could justify riches as the reward for the skill, diligence, fore- 
sight, and cunning of the original creator. None of this justified its 
highly fortuitous devolution on the individual who happened to be 
die son. Monopoly was also regarded with grave misgivii^. This 
rewarded not production but the ability to control production. 
Moreover the rule of competition, a point to be emphasized in a 
moment, was fundamental. Nothing else so completely and utterly 
underwrote the logic of the system. Inequality resulting from mono- 
poly might be the warning of fatal flaws in the system itself. 

Those who might themselves be subject to equaUzation have 
rarely been enthusiastic about equahty as a subject of social comment. 
As a result there has anciently been a muted quality about debate on 
the subject. Still the economists in the central tradition stated their 
position with some clarity. There is, Marshall observed, ‘no moral 
justification for extreme poverty side by side with great wealth. The 
inequalities of wealth though less than they are often represented to 
be, are a serious flaw in our economic organization’.^ In the United 
States Taussig was more specific. ‘No stretch of psychological 
analysis concerning the spur of ambition, the spice of constant emu- 
lation, the staleness and flamess of uniformity, can prevail against the 
universal conviction that the maximum of human happiness is not 
promoted by great, gkrit^, permanent inequality.’* 


The economy of the central tradition presupposed competition. This, 
also, was the source of misgiving— a misgiving that was often 
elaborately disguised but none die less acute. 

The role of competition in the central tradition was fundamental 
and it became increasingly precise. Numerous firms competed to 
supply markets at prices whidi none controlled. The eflicient and the 
progressive were rewarded with survival and growth. The inefficient 
and unprogressive were penalized by extinction. The employees 
obviously were involved in the rewards and penalties of their em- 
ployers and had something of the same inducements to efficiency. 

* Marshall, Principles of Economics, p. 714. * Taussig, op. cit., p. 207. 



Competition was also the instrument of change. As the tastes of 
the sovereign consumer altered, the demand for some products rose 
and so did their prices. The demand and prices of products that were 
less in vogue declined. Firms in the areas favoured by the new 
demand expanded and others were attracted in. Where demand was 
shrinking, firms would close down or lay off workers and contract 
operations. To the extent that this mi^t be possible some would 
follow the market into the areas of expanding demand. Capital as 
well as labour and entrepreneurial talent was distributed according to 
need by the same process. 

In the closing decades of the last century and the early years of the 
twentieth century economists became increasingly preoccupied with 
the operation of the model of a competitive society. As it was de- 
veloped and idealized, it was a thing of precision and symmetry, 
almost of beauty. The hold which it came to exercise on men's minds 
has often been remarked.^ There was no equally explicit appreciation 
of the fact that it committed men to a remarkable measure of imccr- 
tainty. The penalty for falling behind in the race for increased efficiency 
was bankruptcy. This could also be the penalty of mere bad luck in the 
case of the producer whose product was no longer wanted. And in 
the case of the worker the component of luck, as opposed to the role 
of penalty and reward for performance, was multiplied. The most 
oaken worker could turn up in die employ of an inadequate entre- 
preneur. The just misfortunes of the employer would then be visited 
quite irrationally upon diis &ithful servant. He could lose his job and 
his livelihood equally through his own shortcomings and those of 
others. Needless to say, the competitive model had no place for 
individuals who, as the result of age, infirmity, industrial injury or 
congenital incompetence, had only a low or negligible marginal 

These misfortunes did not go entirely imperceivcd. It was ever 
necessary to assert that they were ‘part of the system’. And it was 

^ I have done so in Ameriam Capitalism: The Cmcept of ComUervailitig Power 
(Boston: Houghton Mi£ 9 in, 195a), eq)ecully Chapter II. On the reasonable 
assumption that die only individual less to be forgiven than the man who repeats 
others is the man who repeats himself, my comment here on the competitive 
model is brief. 


also uudc clear by the prophets of the competitive model, not with- 
out a certain ruthless logic, that to seek to mitigate the risks and un- 
certainties of the system would be to undermine the system itself. 
The race for increased efficiency required that the losers should lose. 
If consumers were to rule, there must be rewards for those producers 
who were in the path of current tastes and penalties for those who 
were left behind. To seek to mitigate the penalties was to undermine 
the incentives— to separate the stick from the carrot. 

Abridgment of the rigours of competition might even be unjust 
and immoral. ‘The traders or producers, who find that a rival is 
offering goods at a lower price than will yield them a good profir, 
arc angered at his intrusion, and complain of being wronged; even 
though it may be true that those who buy the cheaper goods are in 
greater need than themselves, and that the energy and resourceful- 
ness of their rival is a social gain.’^ bideed there is a curious likehhood 
that the competitive model, as it was adumbrated by the textbooks, 
was intrinsically more insecure and dangerous than anything pro- 
duced by competition in real life. In the real world competition was 
abridged by custom, monopoly, trade unions, torpor, legislation, 
.md even a degree of compassion. Thus the penalties for falling be- 
liind in the race were exacted less relendcssly in practice than in 

The basic impact of these ideas will be clear. The economic system 
pictured in the central tradition was a thing of peril for those who 
participated in it and so, pro tanto, was economic life at large. This 
peril was a virtue, and the purer die peril the better the performance 
of the system. Yet the intrinsic insecurity was disturbing and in two 
respects. The vulnerability of the weakest members of the society 
could not entirely be ignored. An economic system wliich of consti- 
tutional necessity was so imfeeling, so intolerant of weakness, was 
troubling. Even in the best of causes compassion is difficult to con- 
trol. And equally disturbing was the unwillingness of ordinary men 
—businessmen, farmers, workers, reformers— to live with diat peril. 
At every turn they showed their inclination to press collectively or 
with the aid of government for measures designed to make their life 
more secure. Even if the insecurity of the competitive model was not 
* Marshall, Principles of Economics, p. 8. 



a damaging flaw, the efforts at self-protection that it induced almost 
certainly were. 

In addition, there was the gnawing doubt as to whether com- 
petition, in fact, existed. As the nineteenth century wore along, botli 
firms and fortunes grew. Control over economic life seemed to be 
passing into fewer hands— a development whidi was heralded by 
Marx as marking the system’s doom. As the notion of competition 
became intellectually more precise the behaviour of the economy 
became empirically more at odds with the competitive model Where 
the latter called for many firms in a market there were in real life 
often few. Where the competitive model called for a price that no 
firm controlled, in real life some firms, at least, seemed to have quite 
considerable discretionary power over price. And tmions were not 
without power of their own. 

In the twentieth century economists in die central tradition began 
to accommodate die competitive model to these seeming facts of life. 
Instead of pure competition dicrc was monopolistic competition or 
imperfect competition. But who could be sure that a blending of 
competition and monopoly would be benign? Would not such oddly 
assorted parents produce a iiiis-sli.'ipen progeny?^ 


There was a fuial source of disquiet in the central tradition. That was 
die serious depression. Depression through the nineteenth and the 
first dccadcs'of the twentieth century liad become ever more difficult 
to ignore. Business suffered a sharp setback in the seventies following 
the resumption of specie payment after the Civil War. There was a 
period of comparative stagnation in the nineties and a brief interrup- 
tion following the financial panic in 1907. There was a short but 
severe depression following World War I. Then came the vast 
disaster of the nineteen-diirties. What was the meaning of these 
recurring misfortunes for the future of die system? Perhaps men 
might not starve amidst Malthusian scarcity, but might it not still be 
their &te to starve amidst an abundance they could not buy? Was it 

* I have also dealt with this source of uneasiness, wdiich I regard as of prime 
importance, in American Capitalism. 



not a fair conclusion that by whatever means they were predestined 
to poverty? 

Nothing in the history of social ideas is more interesting than the 
treatment of the so-called business cycle in the central tradition of 
economic thought. Its study was isolated in a separate compartment. 
(To some extent the quarantine still continues.) Prices, wages, rents 
and interest, all of which were profoundly affected by depressions, 
were studied on the assumption that depressions did not occur. 
Normal conditions were assumed; normal meant stable prosperity. 
In the separate study of the business cycle emphasis was placed on the 
peculiar and non-recurring conditions which lay behind depres- 
sion— the retirement of the greenbacks prior to 1873, the reac^ust- 
ments following World War I, the breakdown of international trade 
and capital movements and the collapse of the stock market in 1929. 
But, paradoxically, there was an equal emphasis— sometimes in the 
same work— on the rhythmic and normal character of the succession 
of good times and bad. The etymology emphasiTed the rhythm— as 
noted, the study was not of depressions but of the business cycle 
which served to remind everyone that just as bad times followed 
good, so good times would follow the bad. Even the word depres- 
sion itself was the terminological product of an effort to soften the 
connotation of deep trouble. In the last century the term crisis was 
normally employed. With time, however, this acquired the conno- 
tation of the misfortune it described. And Marx’s reference to the 
‘capitalist crisis’ gave the word an ominous sound. The word panic, 
which was a partial synonym a halfcentury ago, was no more reas- 
suring. As a result the word depression was gradually brouglit into 
use. This had a softer tone; it implied a yielding of the fabric of busi- 
ness activity and not a crashing &U. During the Great Depression the 
word depression acquired &om die event it described an even more 
unsatisfactory connotation. Therefore the word recession was sub- 
stituted to connote an unfearsome &11 in business activity. But this 
term eventually acquired a foreboding quality and die recession ot 
1953-4 was widely characterized as a rolling readjustment. Should 
we have a really serious rolling readjustment this phrase would 
become taboo. 

To view the business cycle as a normal rhythm was to regard it as 



self-correcting. Hence nothing needed to be done about it. Remedies 
are unnecessary if the patient is certain to recover and they are also 
unwise. Writing in 1934, Joseph A. Schumpeter, then with Wesley C. 
Mitcliell one of the world’s two most eminent authorities on die 
business cycle, surveyed the e3q>erience of die preceding century and 
concluded, ‘In all cases . . . recovery came ofitself. . . . But this is not 
all: our analysis leads us to believe that recovery is sound only if it 
does come ofitself. For any revival which is merely due to artificial 
stimulus leaves part of the work of depressions undone and adds, to 
an undigested remnant of maladjustment, new maladjustments of its 

Had depressions always remained mild, die notion of a normal 
rhythm, which wisdom required be undisturbed, would have been 
reassuring. But as depressions became more violent such a view was 
the very reverse of reassuring. Workers lost their jobs. Farm prices 
fell and some farmen lost their farms. Investors lost their savings and 
some businessmen, more particularly the smaller ones, went bank- 
rupt. And all this was insouciantly described as normal. The con- 
clusion was inevitable: there must be somcdiing very wrong with a 
system in which such faults were normal. Especially in the early 
thirties the ideas in the central tradition acted powerfully to breed 
such doubts. And those who were immune to such imeasiness had 
another reason for disquiet. Although it was unwise to do anything 
about depressions, ignorance and popular passion might easily force 
some action. This could only serve to make things worse. In face of 
a really bad depression, the notion of a normal self-correcting cycle 
was calculated to provide uneasiness tailored for every temperament. 

There is little need to stress the consequences. To the lingering 
fear that poverty might be normal, the increasing conviction that 
inequality was inevitable and the sense of individual insecurity wliich 
was inherent in the competitive model, the orthodox view of the 
business cycle added a mucli more general sense of disquiet. This was 
the insecurity of a householder who is told tliat in the normal and 

*J. A. Schumpeter, Essays, ed. by Richard V. demence (Cambridge, Mass., 
Addison-Wesley, 1951), p. 117. This essay was origiiully published in 1934 in 
The Eeonomia of the Recovery Program (New York, Whitdescy House, McGraw- 
Hill). The italics are in the original. 



regular course of events he must expect his house to catch £re and liis 
property to be partially or wholly destroyed. The fire cannot be pre- 
vented or arrested for it has its work to do; to call for a fire depart- 
ment is to invite an attempt to drown the flames by drenching them 
with petrol. 

Su^ was the legacy of ideas in the great central tradition of eco- 
nomic thought. Behind the fi^de of hope and optimism there re- 
mained the haunting fear of poverty, inequality, and insecurity. 
Partly latent, partly in the suppressed backgromid of conviction, 
these doubts could easily be aroused by such an occurrence as the 
Great Depression. 

But the reader will surely ask if there was not a more confident 
stream of ideas— one more completely purged of all traces of the 
Ricardian gloom. The question will occur especially to Americans: 
surely in the American tradition there must have been a more con- 
sistently optimistic current. Here there must have been some who 
rejected doubt— who reflected an indigenous and abounding confi- 
dence. Perhaps among those who neither read nor wrote there was 
such confidence. But those who gave voice to the American ideas 
were far firom confident. 


The American Mood 

Only witliiii very narrow limits can one speak of a separate Ameri- 
can tradition in economics. Ideas do not respect national frontiers, 
and this is especially so where language and other traditions arc in 
common. The precepts of the central tradition were accepted equally 
by Englishmen and Americans. It was from Smith, Ricardo, Mill, 
and Marshall that American economic ideas were derived. The ideas 
were written by Americans into the textbooks and enlarged or 
amended as to detail. But in the last century not much was added by 
American theorists. Just as the ideas were common to both countries 
so were die worries, uncertainties, and doubts which the ideas 

This is not to say there were no distinctively American figures but, 
as compared witli the majestic audiority of the central tradition, their 
influence was comparatively small. There would be a measure of 
agreement on who were the three that were most heard. They were 
not the total of die American voice but they were also far more than 
a mere sample. Of the three, two did nothing to offiet the presump- 
tion of privation and the sense of foreboding which lingered in the 
central tradition. On the contrary they did a good deal to accen- 
tuate it. 

The exception was Henry Charles Carey (1793-1879) who did 
voice the buoyant optimism which one is obliged to diink appro- 
priate to die new republic. Ricardo, he observed, had never seen 
from his window the progress of a new settlement; had he done so 
he would have had a different view of the prospects for mankind. 
Drawing on such observation he argued diat, widi the passage of 




hrtip, men were not forced as Ricardo claimed to poorer and poorer 
land with ever lower return to their labour and, for any land that was 
better than the wont, ever higher rents to the landlords. On the con- 
trary they first cultivated the diin but unencumbered soil on top of 
the hills. Then at a later period diey tackled the duck vegetation in 
the valleys; having cleared away the trees they proceeded to work 
this richer alluvial soil. The returns to their toil were not less but 
more. In his first book in 1835 which, like those of his English con- 
temporaries, centred on the problem of wages and thus as ever on the 
mass prospect for poverty or well-being, he argued that real wages 
during the previous forty years had shown a tendency to rise. This, 
too, was in contrast with Ricardian expectations. 

But even Carey was not an unqualified optimist. He more than 
half-agreed with Malthus on the procreative power of mankind and 
in his earlier books he hazarded die guess that the time might come 
when ‘ there will not even be standing room’.^ And the influence of 
Carey, whether as an optimist or pessimist, was not great. Of this he 
himself was aware. He complained bitterly of the small attention 
that was paid to liis ideas in his own country. In Europe he felt that 
he was discussed more seriously, and tliis may well have been so.* 
Litde or nodiing of Carey passed into die tradition of American 
economic thought. His books mouldered and died. In the last fifty 
years he has been mentioned only as a curiosity— an early American 
economist who had the fortitude to disagree with Ricardo on rent 
and with Adam Smith on die virtues of free trade. 


The two odier distinctively American figures had more enduring 
influence. These were Henry George and Thorstein Veblen. But so 
far from manifestuig the exuberant attitudes of the frontier, both 
were prophets of a gloom that was, in some respects, more profound 
tiian tliat of Ricardo. Henry George (1839-97) was like Marx the 
foimdcr of a faith, and the faidiful still assemble to do honoiu: to their 

* Quoted by Gray, The Development of Economic Doctrine, p. 236. 

* See Joseph Dorfman, The Economic Mind in American Civilisathti, t 6 o 6 -i 86 s 
(New York, Viking, 1946), p. 804. 




prophet. Like Adam Smith he made clear his view of the social 
prospect in the title of his remarkable hook: Progress and Poverty. An 
Inquiry into the Cause of Industrial Depressions and of Increase of Want 
with Increase of Wealth. In the opening chapter he posed his basic 
questions: Why in a time of goieral economic advance— he was 
writing in die dqpression years following 1873— should so mucli 
labour ‘be condemned to involuntary idleness*, shorild there be so 
much ‘pecuniary distress among businessmen’, and so much ‘want, 
suffering and anxiety among the working classes Why, to press 
things furtlier, should there be so little gain to the poorest classes from 
increased productive power. ‘Nay, more,* why should its effect be 
‘still further to suppress the condition of the lowest classes*.* 

The reason for this pervene aspect of progress was again part of the 
almost infinite legacy of Ricardo. Labour and capital increased in 
productivity; the land supply remained constant in quality and 
amount. Rents, as a result, increased more than proportionately and 
made the landlords the undeserving beneficiaries of advance. The 
anticipation of rent increases and attendant speculation in land values 
was also the cause of depression. (It is worth recalling that the nine- 
teenth centvuy was marked by recurrent outbreaks of real-estate 
speculation, especially in the West, and that Henry George spent 
much of his life in California. Economic ideas, as ever, have dieir 
nexus with their environment.) So long as there was private property 
in land, poverty and depressions were the prospect. Progress would 
make them wone. 

In one respect Henry George was radically more optimistic than 
Ricardo. On his title page were the further words The Remedy; this 
phrase had no place in the Ricardian lexicon. If land were national- 
ized— more precisely if a tax were imposed equal to the annual use 
value of real property ex its improvements, so that it would now 
have no net earnings and hence no capital value— progress would be 
orderly and its fruits would be equitably shared. But this, obviously, 
was a very drastic prescription. Were the remedy not appUed, and 
this was a reasonable prospect given the predictable reaction of 

* Bbnry George, Progress and Poverty (Hftieth Anniversary Ed.; New York, 
Robert Shalkenbach Foimdation, 1933), p. 5. 

* lUd., p. 9. 



property owners to the proposal, then the consequence would 
be r nt i tinning poverty combined with increasing inequality and 
inrrrasing insecurity. If this was the American dream, it had little to 
commend it as compared with the meagre classical prospect. And 
in fict the mood of Henry George’s followers was often one of 
misanthropic or frustrated radicalism. 


In the tradition of American popular radicalism there were other 
influential figures besides Henry George— Henry Demarest Lloyd 
and Edward Bellamy come especially to mind as important figures 
of the latter decades of the last century. Their conclusions, however, 
were broadly similar: great inequality and great poverty were inevit- 
able in the absence of great reform. And unlike Henry George their 
words mostly died widi tliem. There remains, however, the man 
whom many regard as tlie uniquely American economist, Tliorstcin 
Vcblen (1857-1929).^ 

For the eager search for re.nssurancc that followed die Ricardian 
gloom, Veblcn substituted a grandiloquent iconoclasm. Ricardo had 
forecast a disi^recable fate for most of mankind. His foUow'en hoped 
against hope that it might not be. Vcblen took a position above the 
debate. The fate of man was something with which, at least for pur- 
poses of posture, he cliose not to identify himself. But he also made 
clear his view that those who talked of progress were mostly idiots 
or firauds. 

To this end he made specific many of the misfortunes that lurked 
in the background of the central tradition. Poverty, or more accur- 
ately bodi the moral and material debasement of man, was part of 
the system and would become worse widi progress. There is an 

* A case might be made for the influence of three other men who were generally 
outside the central tradition; namely, Simon N. Patten (1852-1922), John R. 
Commons (1862-1945), and Wesley C. Mitchell (1874-1948). However, Patten, 
a singularly interesting and original figure, has joined Carey in the neglect reserved 
for American heretics. Commons and MitdicU, as a matter of piindiple or method, 
largely avoided any overall theoretical formulation of man’s prospects and hence 
could not be said to have contributed to the attitudes with ^^lich we ate here 



inescapable conflict between industry and business— between the 
‘excessive prevalence and efficiency of the machine industry* and its 
‘deplorable* tendency to overproduce and thus to threaten the basic 
goal of business which is to make money.^ In this conflict business 
always wins. Monopolistic restrictions are imposed where, on purely 
technical grounds, there could be abundance. This channels income 
to the owners. The public pays with relative impoverishment. 

The economic costs of progress arc, however, even less severe than 
its cultural consequences. Machine industry docs not necessarily call 
for less intelligence on the part of the workers. But it docs require a 
peculiarly narrow and mechanical process of thought and it dis- 
courages all other. It also undermines family and church and (here 
the unions play a key role) die ancient foundations of law and order. 
The massing together of the workers is a great inducement to ‘ socialist 
iconodasm* which is the threshold to anarchy. 

Serious depressions arc not accidental misfortunes. They arc 
inherent in the conflict between industry and business and hence arc 
organic aspects of the system. They occur ‘in the regular course of 

Finally, in liis immortal The Theory of the Leisure Class, ^ Veblen 
dramatized, as no one before or since, the spectacle of inequality. The 
rich and successful were divorced from any serious economic func- 
tion and denied the dignity of even a serious or indignant attack. 
They became, instead, a subject for detached, bemused and per- 
haps subtly contemptuous observation. One observes the struggle 
between hens for social pre-eminence in the chicken yard as an inter- 
esting phenomenon but in so doing one does not do much to under- 
write ffic social values of the birds. So with Veblen on the rich. 

But equally with Ricardo, wealth and poverty were made inher- 
ent. And so, moreover, were their least ingratiating aspects. The 
ostentation, waste, idleness, and immorahty of the rich were all pur- 
poseful: they were the advertisements of success in die pecuniary 

^ Thorstein Veblen, The Theory of Business Enterprise (1932 ed.; New York 
Scribner), p. 234. 

® Aid., p. 183. The conclusions sketched above are principally developed in 
The Theory of Business Enterprise, 

® Published in 1899. This is available in the Modem Library. 




culture. Work, by contrast, vras merely a caste mark of inferiority. 
‘During the predatory culture labour comes to be associated in men’s 
habits of thought Avith weakness and subjection to a master. It is, 
therefore, a mark of inferiority, and, therefore, comes to be accounted 
unworthy of man in his best estate.’^ In the central tradition the 
worker was accorded the glory of honest toil. Veblen denied him 
even that. 

Nor was there any hope for change. These things were part of the 
pecuniary culture. Where Marx looked forward hopefully to revo- 
lutionary reconstruction, Veblen did not. In his latter years he com- 
forted himself only with the thought that the evolving economic 
society was destroying not only itself, but all civilization as well. Such 
was the view of the greatest voice firom the frontier. 

There will always be debate as to how influential Veblen was. He 
is the indubitably indigenous figure in American economic thought. 
This has always commended him to those who— failing to see the 
enormous authority of the orthodox-classical tradition— have sup- 
posed that the dominating influence in American thought must be 
an American.* This must still be true even though, as in die case of 
Veblen, no one could worse fit the cultural stereotype of the opti- 
mistie, extrovert American. In fact Veblen’s strictly economic 
conclusions were not widely read or taught. They never entered the 
textbooks in competition with the ideas of the central tradition. Yet 
he was no Carey. He influenced a generation of sdiolars, writers, and 
teachers. These, in turn, broi^ht something of his iconoclasm to the 
ideas of the time. Teachers influenced by Veblen taught the doctrines 
of the central tradition but they brought to it a disbelief, even a con- 
tempt, for the notion that economic progress could much benefit the 
masses or, indeed, that there was su^ a thing. Veblen thus precipi- 
tated the doubts and pessimism which lurked in the coitral tradition, 
in American social thought before the Great Depression there was a 
strong freling, manifested for example in such liberal journals as 
The Nation and The New Republic, diat the hard-headed intellectual 

* The Theory of Ae Leisure Class, p. 36. 

* This is a criticism which, I think, can fiuily be made of Professot Conunager. 
Cf. his discussion of Veblen in The American Mind (New Haven, Yale University 
Press, 1950), pp. 227^46. 



was never beguiled by notions of reform or advance under capital- 
ism. These when offered were either a fa9ade, a trap, or an illusion 
which would quickly bring disenchantment. These attitudes faded 
widi the New Deal, but not until the Roosevelt reforms had been 
similarly and repeatedly discussed and dismissed. These attitudes were 
in no small measure the legacy of Veblen. 


Such was die distinctively American contribution. However, we 
must take note of the impact of anodier set of social ideas— ideas 
which though not American in origin came almost uniquely to root 
in the American soil. Toward the close of the last century and in the 
early years of this they deeply influenced attitudes on the fate of the 
ordinary man. These were the doctrines of the Social Darwinists. 

Ricardo and Malthus did not conceal from anyone that theirs was 
a world of struggle. In that struggle some, and perhaps many, suc- 
cumbed and there was no hope in public measures to ameliorate the 
lot of those who were to Speaking of the poor laws, then sup- 

ported by a fund subscribed by each parish for the support of the 
indigent, Ricardo concluded that no scheme for their amendment 
‘merits the least attention, which has not thdr abolition for its ulti- 
mate object’, adding that ‘the principle of gravitation is not more 
certain than the tendency of such laws to change wealth and power 
into misery and weakness’.* 

However, Ricardo’s case for leaving everything to die market— 
for not allowing compassion to interfere with economic process 
—was essentially functional. Idleness not being subsidized and sub- 
stance not being wasted, more was produced and die general well- 
being would flhus be raised. Stn^gle and tmisfortune were not 
themselves to be welcomed. 

The position of the Social Darwinists was different. Economic 
society was an arena in which men met to compete. The terms of the 
struggle were established by the market. Those who won were 
rewarded with survival and, if they survived brilliandy, with riches. 
Those who lost went to the lions. This competition not only sdected 

^ Frindpks MUteal Eemmy, pp. 107-8. 



the Strong but developed their faculties and insured their perpetua- 
tion. And in eliminating the weak it ensured that they would not 
reproduce their kind. Thus the struggle was socially benign and, to 
a point at least, the more merciless the more benign its efiects, for the 
more weaklings it combed out. 

The birthplace of these ideas was nineteenth-century England, and 
their principal source and protagonist was Herbert Spencer (1820- 
1903). It was Spencer and not Charles Darwin who gave the world 
the phrase ‘the survival of the fittest', and it was first applied not to 
the lower animals but to mankind. Spencer believed that acquired as 
well as inherited traits were genetically transmitted. 

Spencer was a decidedly uncompromising exponent of a very un- 
compromising creed. He opposed state ownership of the post office 
and the mint. He was opposed to public education, for it interfered 
with parental choice between different schools and, indeed, with the 
choice between wisdom and ignorance for their children. Public aid 
to the needy and even public sanitation tended to perpetuate the 
more vulnerable memben of the race. 

Partly by weeding out those of lowest development, and partly by sub- 
jecting those who remain to the never ceasing discipline of experience, 
nature secures the growth of a race who shall both understand the condi- 
tions of existence and be able to act up to them. It is impossible in any 
degree to suspend this discipline by stepping in between ignorance and its 
consequences, without, to a corresponding degree, suspending the progress. 
If to be ignorant were as safe as to be wise, no one would become wise.^ 

Spencer was restrained from a condemnation of all private charity 
only by the disturbing thought that this would abri^e the liberty of 
the giver as surely as it would winnow out the weaklings of the race. 
Misery and misfortune are not misery and misfisrtune alone but the 
rungs of a ladder up which man makes his ascent. To seek to mitigate 
misery was to put in abeyance the fundamental arrangements by 
which nature insured progress. ‘What can be a more extreme 
absurdity than that of proposing to improve social life by breaking 
the fundamental law of social life.’ * 

^ Social Statics (New York, D. Appleton, 1865), p. 413. 

* Principles of Ethics, vol. 11 (New York, D. Appleton tc Co., 1897), p. 260. 



Although Spencer was an Englishman, Social Darwinism had 
much of its greatest success in the United States. Here, in William 
Graham Siunncr (1840-1910) of Yale, it found its nujor prophet. 
Here too it found a host of minor ones. Spencer’s own books were 
widely read, or at least widely discussed, in the closing decades of die 
nineteenth century and the opening years of the present one. When 
Spencer visited the United States in 1882, he was accorded a welcome 
by the faithful befitting a messiah. In 1904, when the Supreme Court 
struck down a New York State law limiting the hours of labour of 
bakers to ten a day. Justice Holmes observed that ‘The Fourteenth 
Amendment does not enact Mr. Herbert Spencer’s Social Statics.’^ 
It was a dissenting opinion. 

There were a number of reasons for this popularity in the new 
republic. By the time of Spencer, England was already moving away 
from the unhampered rule of the market. Unions, factory inspection, 
the regulation of the hours of women and children had gained 
acceptance. In the United States die race was still being more ruth- 
lessly improved. 

And there were many who wished to see the improvement con- 
tinue with all it implied for those who had been selected. ‘The pecu- 
liar conditions of American society’, Henry Ward Beecher told 
Spencer as early as 1866, ‘has made your writings far more quicken- 
ing here than in Europe.’* In &ct, ideas were never more mar- 
vellously in the service of circumstance. 

The rise of Social Darwinism in the United States coincided with 
die rise of the great fortunes. It was a time not only of heroic in- 
equality but of incredible ostoitadon. Great limestone mansions were 
rising in New York. Even mote stately pleasure domes were being 
built in Newport. Mrs. William K. Vanderbilt gave her $250,000 
ball in 1883. That of Bradley Martin in 1897 was rather more lavish. 
For this the ballroom of die old Waldorf-Astoria was transformed 
into a replica of Versailles. One guest appeared in a suit of gold-inlaid 
armour valued at an estimated $10,000. A little earlier at Dcl- 
monico’s— where Spencer had been entertained— guests were given 

* Lodiner v. New York, 1904. 

* Quoted by Richard Hofitadter. Scant Dnmhriatt in American Thought (fioston. 
Deacon Press, 1955), p. 31. 



cigarettes wrapped in himdred-doUar bills which they lighted with a 
legitimate sense of affluence. 

It was also a time of widespread poverty and degradation. The 
distant workers who supported this wealth lived in noisome slums. 
There were numerous beggars near at hand. Nor could it always be 
said that the wealth was being acquired without cost to others. The 
techniques were sometinics very rude. But none of this need lie on 
anyone’s conscience. Natural selection was at work. The rich could 
regard themselves as the product of its handiwork— as Chauncey 
Depew was pleased to remind those who attended one of die great 
diimers of the successful in New York. So, an important point, would 
be their sons for the superior qualities were genetically transmitted. 
This legitimized inherited wealth, for it blessed only the biologically 
superior. The problem of poverty, meanwhile, was being solved by 
the only means by which it could be solved. The unfit were being 
weeded out. Public and even private succour, which if compelled by 
compassion could be inconveniendy expensive, was banned not by 
callousness but by a perceptive adherence to the laws of nature. ‘The 
law of the survival of the fittest was not made by man. We can only 
by interfering with it produce the survival of the unfittest.’^ How 
much better to resist taxation and diarity and, incidentally, keep 
one’s money. To this day the man who refuses a beggar and righ- 
teously observes, T’m told it’s the worst thing you can do’, is still 
finding useful the inspired formula of Spencer and Sumner. 

Nor need one reflect, imcomfortably, on the methods by which 
growth had beoi achieved and wealth acquired. As John D. Rocke- 
feller explained to a fortunate Sunday-school class: ‘The growth of 
a large business is merely the survival of the fittest. . . . The American 
Beauty rose can be produced in the splendour and fragrance which 
bring cheer to its beholder only by sacrificing the early buds which 
grow up around it.’ As with the rose, so with the Standard Oil 
Company. ‘This is not an evil tendency in business. It is merely the 
worl^g-out of a law of nature and a law of God.’* This aligned God 
and the American Beauty rose with railroad rebates, exclusive con- 

1 William Graham Sumner, Essays in Political and Social Science (New York' 
Henry Holt, 1885), p. 85. 

^Hotfudter, Social Darwinism in American Thought, p. 45. 



trol of pipelines, systematic price discrimination, and some other 
remarkably aggressive business practices. 


In 1956 the retiring president of the National Association of Manu- 
&cturers, Mr. Cola G. Parker, called solemnly in the name of 
Herbert Spencer on the working men of die coimtry to reject the 
slavery of their unions and on businessmen to renounce the paternal- 
ism of Washington. Concerning the latter he said in a dynamic sen- 
tence: ‘Before we can build soUdly into the glorious future this is 
another imsound part of our structure which we'll have to get rid 
of, even though it causes severe pain to us businessmen to forgo die 
federal crutches we have been leaning on.* Neither workers nor 
businessmen took any concrete steps in response to his plea. 

However, the names of Spencer and Sumner had long before 
ceased to evoke response. Bodi democracy and die modem corpora- 
tion had dealt crippling blows. The masses of the people had shown 
a marked unwillingness to vote for the self-denying policies which 
would contribute to their own combing out. Individuals were always 
coming forward with ideas for abridging the struggle and winning 
elections on this platform. If Social Darwinism was to work, there all 
too obviously had to be some curtailment of popular government. 
To enforce acquiescence in misfortune there also needed to be a 
constabulary whose loyalty was properly insured by social security 
and seniority. 

The corporation dealt a different kind of blow. The compedtive 
struggle, as a device for sq>arating die strong from the weak, at least 
had dements of plausibility in ^e world of the individual entre- 
preneur. And conceivably ^e rugged traits which permit of survival 
in this contest are passed on to strengthen the generadons that follow. 
It is not so easy to apply this reasoning to the case of General Electric 
or General Motors. These sliow marked indicadons of immortality. 
And it is not dear how sdecdon works through reproduedon to 
bring a new generadon of youi^ and vigorous companies r^eedng 
the strong bloodlines of their corporate parents. Peihaps it could be 
argued that natural selection operates to bring to die top those ivbo 



are most efiective in the struggle for promotion— that it rewards with 
survival those who are most sidled in the tough, comploc, 
and ingenious talents that such advance so often requires. If so, 
then Social Darwinism would work just as selectively in govern- 
ment where the bureaucratic struggle is reputedly severe. This could 
not be. 

Yet Social Darwinism bore importantly on the attitudes whicli 
Americans brought into the age of affluence. This was the country 
where wealth was increasing most rapidly. It was the one where the 
reassurance of the central tradition might seem to be most plausible. 
Here, if anywhere, die ordinary man had a chance. Perhaps he did, 
but he also had to face the fact diat all economic life was a mortal 
struggle. He miglit win but he ako might lose, and for him to accept 
die full consequences of loss— himger, privation, and death— was a 
social necessity. Poverty and insecurity thus became inherent in the 
economic life of even the most favoured country. So, of course, did 
inequality, and this was firmly sanctified by the fact that those who 
enjoyed it were better. If observation suggested that economic life 
might be less severe in the United States, Social Darwinism empha- 
sized the contrary. 

It had another lasting efiect. American thought has always been 
prone to attribute a mystique to the market. More than mere 
efficiency is involved in uninhibited operation of supply and demand. 
Other values are at stake. The Social Darwinists identified the vigour 
of the race with the market. This notion ivithered and disappeared. 
But it was easy for others to identify yet other and equally extraneous 
values with the market and to warn, accordingly, of the pervasive 
consequences of anything which, in the name of wdfore or com- 
passion, might interfere with the firee play of market forces. Bio- 
logical progress is no longer threatened by measures which lessen the 
perils of economic life for the individual. But liberty still is. So, in one 
fairly substantial view, is Christianity and the chance for eternal sal- 
vation. To a considerable degree it was Social Darwinism which led 
the way in so broadening the claim for the market. In so doing it 
narrowed the scope for social measures designed to rescue the indi- 
vidual fi:om the privation or to protect him from the hazards of 
economic life. 



One would not care to claim tliat tliis chapter exhausts the influ- 
ences which liave home distinctively on American economic atti- 
tudes. As noted, die frontier and the West had tlicir own expansive 
mood. So, on the whole, did a good deal of American political debate 
in die latter part of the last century and the early decades of the 
present one. Without question much of this expressed the conviction 
that any American— at a minimum any properly energetic American 
of Anglo-Saxon and Protestant antecedents— could by his own efforts 
be comfortably opulent. But the ideas which were tauglit and read, 
and by which die properly quahfied were guided, were far from 
sanguine. The most influential critics were either misandiropic or 
committed to the need for massive reform. The establislied right 
pictured and praised a struggle diat improved on diat of Ricardo 
only in being more heroic and spectacular and in rejoicing over die 
immolation of the unfortunate. 



The Marxian Pall 

In the descent from Ricardo tlic Social Darwinists were an eddy to 
the right. Marx was a massive eruption to the left. But the roots of 
Marx were deep in the central tradition. There were socialists before 
Marx, but there have been a great many more since. One reason is 
diat Marx built socialism on Ricardo’s orderly arrangement of eco- 
nomic ideas and, in particular, on his bold conception of the problem 
of income distribution. At least partly as a result, his work carried an 
authority and conviction that was incomparably greater than any of 
Iris sociahst predecessors’. 

For seventy-five years following liis dcadi, Ricardo’s admirers 
were concerned to defend him from the charge, levelled among 
others by Rtiskin, diat he was a cold-blooded stockbroker who took 
a totally detached view of the misery he foresaw for all eternity. The 
charge may have been unfair, but no one has suggested that Ricardo 
was a man of passion. Karl Marx (1S18-83) was a man of passion and 
of Jovian wrath, and this is a matter of first importance. For the 
Ricardian conclusions — the inevitable impoverishment of the masses, 
the progressive enridunent of those who own the natural means of 
production, the inevitable conflict between w^es and profits and the 
priority of the latter for progress—could become, in the hands of an 
angry man, a call to revolution. As noted, Marx’s conception of 
capitahsm was no more gloomy than that of Ricardo or of Malthus. 
But unlike Ricardo and Malthus, Marx’s mission was to identify 
fault, place blame, urge change and, above all, to enhst disciplined 
belief. In the latter his success exceeded diat of any mao since 





The iron law of wages continued in Marx but in a modified form. 
The worker is kept on the margin of destitution less because he 
breeds up to this point than because of his utter weakness in d ^tling 
with the capitalist employer and because the system won’t work if 
he is well paid. On occasion he may get more than the bare mini- 
mum, but it is for the same reason that the dairyman feeds his cows 
more than the maintenance ration— tliey give liim more milk. The 
bargaining position of the worker vis-a-vis the employer is the 
same as that of the cows vis-a-vis the dairyman. 

This is partly so because the labour force is a reservoir into which, 
with the passage of time, independent craftsmen and &rmers are also 
forced. Helplessness is assured by the industrial reserve anny — by the 
rising and falling but enduring margin of unemployment which is 
part of the system. Any worker at any time can be flushed into this 
reserve which ensures that he will be co-operative and will accept the 
wage that is offered him. 

The advance of the arts and tlie accumulation of capital bring no 
benefit to tire average man. On the contrary, in some of Marx’s 
characteristic prose, they ‘. . . mutilate the labourer into a fragment 
of a man, degrade him to the level of appendage of a machine, 
destroy every remnant of charm in Ins work and turn it into hated 
toil . . . drag his wife and child beneath the Juggernaut . . . [they 
bring] misery, agony of toil, slavery, ignorance, mental degrada- 
tion. . . 

Resorting to a device which many others have found useful, Marx 
dug up a candid opponent to help him make his case. A prominent 
conservative, Destutt de Tracy, had observed: ‘In poor countries the 
people are comfortable, in rich nations they are generally poor.’* 

Further, and in its ultimate influence perhaps the most important 
of all, the system had an inherent tendency to devastating depression. 
Sismondi, the great French historian, philosopher and economist, 
had published at the beginning of the century a book which reflected 
muic^ of the hopeful attitude of Adam Smith. Then, sixteen years 

* Capital (London, William Glieslwr, 1918)1 pp* <S6o-i. * Und^ p. 664. 



later and after extensive travels over Western Europe, he returned to 
the subject impressed by the importance of industrial crises and 
persua^d that they would get worse. The trouble was that the pur- 
chasing power of Ac workers did not keep abreast of what Aey pro- 
duced. As a result, goods accumulated for which Acre were no 
buyers. A crisis became inevitable. Marx’s view of depressions, which 
he was still working out when he Aed, was roughly similar and so, 
in recent times, has been that of almost everyone. 

However, Marx stressed oAer causes too. As capital accumulated, 
the rate of return would fall. This would weaken incentives and lead 
to peiioA of torpor and stagnation. Also in boom times Ae indus- 
trial reserve army— Ac unemployed— would be reduced, and Ae 
resulting competitiou for labour would force up wage rates, and 
hence costs of production, and this would bring Ae boom to an end.^ 
Nothing so well suggests Marx’s intransigent pessimism on Ae out- 
look for Ae worker under capitalism as diis. A temporary betterment 
of his position is Ae cause of a prompt worsening of it. Depressions 
are caused boA by Ae poverty of Ae workers (and Aeir insufficient 
purchasing power) and equally by temporary improvements in Aeir 

Since Ae govenmicnt, for Marx, was Ac handmaiden of Ae 
bourgeoisie, Aere was small HkcHhood Aat it would be impelled to 
succour Ae unemployed by making jobs for Aem. But were it to do 
so Ae effect would be only to reduce Ae industrial reserve army, 
raise wage costs, and cause a depression. To correct Ae deficiency of 
purchasing power— Ae deficiency Aat kept workers firom buying 
Ae products of Aeir labour— by public measures to put more pur- 
chasing power in Ae hanA of Ae people, as by spending for public 
works, would be futile for Ae same reasons. Also Aere are deeper 
disorders in Ae process of ‘production and reproduction’ which such 
superficialities leave untouched and which render Aem worthless.* 

^ Marx’s explanation of the business cycle is scattered through his work and is in 
some respects, as Professor Schmnpeter has observed, rather casual This summary 
owes much to Mrs. Joan Robinson’s indispensable book. An Essay on Marxian 
Economics (London, Macmillan, 1952). 

* I should, perhaps, remind the reader that I am here concerned with a charac* 
tcrization of the Marxian position and of its impact on attitudes and not with a 
critique. Marxian critiques are still very, very long. 



This point is one of considerable importance to Marx and even more 
to his followers. Were it possible to prevent depressions by compen- 
sating for the deficient purchasing power of the worker with (say) 
public spending, dien capitalism might be workable. Instead of revo- 
lution there would be a budget deficit. Every acute Marxian has seen 
the danger and denied the possibility of such an easy escape. In one 
of those developments which make economics such an engaging 
study in odd bedfellows, the Marxists have been joined in this con- 
tention by the most stalwart conservatives.* 

With the longer-run Marxian prospect everyone is familiar. 
Capitalist concoitration proceeds; productive plant and resources 
come to be owned by ever fewer people of ever greater wealth. The 
Marxian capitalist has infinite shrewdness or cunning on everything 
except matters pertaining to his own ultimate survival. On these he is 
not subject to education. He continues wilfully and reliably down the 
path to his own destruction. The worker, by contrast, whom he 
degrades and beats to a hopeless pulp, is gifted with quick perception 
and the capacity to leam. He is reinforced by *. . . fresh elements of 
oilightenment and progress ’ from the sections of die ruling class who 
are extruded by the process of capitalist concentration.* In the end die 
centralization of production produces hopeless weakness in fact of the 
masses of the workers who by now have become a disciplined indus- 
trial army. Then the knell sounds and the expropriators are expro- 
priated. At the next stage Marx joins the optimists. The path is now 
open to a laissez-foire more complete by far than that of Ricardo. 
For gov ernmen t was occasioned by the needs of capitalism and the 
acquisitive mentality which capitalism produced. With no further 
need to police the masses or curb the larceny which is the manifes- 
tation of acquisitive modes of thought, the state can begin to wither 

* Question: Then you don’t believe in compensatory spending? 

Secretary Humphrey: What do you mean by that? 

Question: In other words, increasing the level of government spendii^ durii^ 
a period in which business generally is declining. . . 

Secretary Humphrey: No; I don’t think so, Joe. I don’t think you can spend 
yourself rich. 

—Transcript of Press Conference by former Secretary of the Treasury George M. 
Humphrey, Congnssiorul Record, Jaanary 17 , 1957> f- ^ 5 - 

* Communist Manifesto. 



away. But first, unhappily, there was the revolution. A very large 
number of people were never able to project their minds much be- 
yond this discomforting prospect. And as Marx billed it—'. . . the 
forcible overthrow of all existing social condition. Let the ruling 
classes tremble . . .'‘—it was discomforting. 


Nothing has ever been so badly understood as the influence of Marx. 
That he seized the minds of millions is, of course, agreed. But it is 
widely supposed that Marx’s influence ends with these faithful. In the 
conventional wisdom his ideas are a kind of infection, like smallpox. 
Either men get it and are permanently scarred, or they escape it 
because of efiective inoculation and are tmtouched. Nothing could be 
further firom the truth. Marx profoundly affected those who did not 
accept his system. His influence extended to those who least supposed 
they were subject to it. 

In part this was the result of the breath-taking grandeur of Marx’s 
achievement as an exercise in social theory. No one before, or for 
that matter since, had taken so many strands of hiunan behaviour and 
woven them together— social classes, economic behaviour, the 
nature of the state, imperialism, and war were all here and on a great 
firesco which ran &om deep in die past to fiu: into the future. On class 
conflict, or imperialism, or the causes of ludonal war, Marx was 
bound to be influential, for he was the only man who had ofl^ed an 
explanation which was at all integrated with the rest of human 
experience. Thus all American thought has been deeply influenced 
by a Marxian view of imperialism. It could not be otherwise. The 
break with British imperialism came on economic issues. To this day 
the principal alternative to explaining imperialism in terms of econo- 
mic self-interest is to argue the benevolence of the imperial power, 
its commitment to the white-man’s burden, and its feeling dut the 
natives arc not ready for independence. No one in the United States 
is more suspicious of such a defence by the colonial power than the 
right-wing Republican who is conditioned to search for die econo- 
mic modvadon behind any argument. 

‘ Communist Manifesto. 



‘As an economic theorist Marx was first of all a very Icamed man/'i 
His goals were those of a revolutionist, but his method was that of a 
scholar and scientist. Accordingly his concepts helped all social 
scientists in their perception of reality. In a world but little removed 
from poverty, and where great store was set by wealth, it was inevit- 
able that most conflict would have an economic cause. Nothing else 
was nearly so worth quarrelling about. Even where there was some 
other ostensible cause— love, honour, patriotism, or rchgion— a more 
penetrating or cynical view could be expected to discern some eco- 
nomic motive. This in simple outline was Marx’s materialistic con- 
ception of history. Though it was not original with Marx— as he 
made clear— he made it famous. It is something tliat the modem 
businessman accepts as a matter of course. When he secs someone 
agitating for change, either at home or abroad, he inquires, almost 
automatically: ‘What is there in it for him?’ He suspects that the 
moral crusades of reformers, do-gooders, liberal politicians, and 
public servants, all their noble protestations notwithstanding, are 
based ultimately on self-interest. ‘What’, he inquires, ‘is their 

Marx foresaw, in the process of capitalist concentration, tlie ten- 
dency for the control of the capital resources of the commiuiity to 
pass into fewer and fewer hands. As the matcriaUstic view of human 
motivation is fundamental in American conservatism, so capitalist 
concentration is a prime tenet of American liberalism. It is Marx, in 
considerable measure at least, who agitates year in and year out for 
the enforcement of the anti-trust laws. 

In the central tradition of economic tlicory, the existence of social 
classes— of capitalists, middle class, and proletarians— was only sur- 
reptitiously conceded if at all. Yet classes obviously existed; so did 
so mething that looked suspiciously like dass conflict. For a percep- 
tion of these matters the world had also to rely on Marx. 

Finally, Marx gained influence by heralding the truly terrifying 
depression. In the central tradition, as noted, the depression was a 
routine aflhetion. For Marx it was an increasingly devastating fact of 
capitalist Hfe. In the end a depression would destroy (or at least mark 

^Joseph A. Sduimpcter, apiUilim, Soculism and De mocracy (and ed.; New 
York, Ibrper, ij>47)f P- 


the destruction of) the system. On this, of all matters, it was difficult 
to say that Marx was wrong for plainly by the nineteen-thirties 
depressions were not routine. In 1934, in the third year of the Great 
Depression, John Strachey, then the most articulate contemporary 
Enghsh Marxist, surveyed the current economic situation and con- 
cluded, not without satisfaction, that ‘ the whole capitahst world is on 
its way to barbarism’.^ But the judgment of die most orthodox of 
Enghsh economists in the same year, except in being tinged with 
regret, was not different. Sir Arthur Salter concluded that ‘the defects 
of the capitalist system have been increasingly robbing us of its 
benefits. They are now dureatening its existence.'® 


Had Marx been mostly wrong, his influence would quickly have 
evaporated. The thousands who have devoted their attention to 
demonstrating his errors would have turned their attention else- 
where. But on much he was notably right, especially in relation to 
his time. The latter point is worth emphasizing. Most economic 
philosophers needed only to be right as regards their own time. No 
one defends Adam Smith in his conviction diat corporations— joint 
stock companies— had no future. But the Marxists require that Marx 
be right not only for his own time but for all time. This is a truly 
formidable test. 

And it was because Marx was so manifesdy right on some things 
that few could suppress the insistent question: Might he not be right 
on other things— including the prospect for capitalism itself? Might 
it be that Marx faced facts while others sought the dubious shelter of 
wishful thinking? Such thoughts, as much as the convictions of his 
converts, were the measure of Marx's influence. In those who resisted 
behef he still had an unparalleled capacity to inspire doubts. Lurking 
just beneath tlic sturface in the mind of every non-Marxian— everyone 
at least who was sensitive to any form of thought— was the question: 
Am I Dr. Pangloss? 

®Jolm Sttachey, The Cmii^ Struggle for Power (4th cd.; London, GoUanez, 
1934). p. 8 . 

* Arthur Salter, Recovery: The Second Effort (London, G. Bell & Sons, 1934), 
p. 209. 



And to this doubt die converts also contributed. Wlicrcas those 
who remained in the central tradition of economics wondered, the 
Marxists did not. They were certain. No wish for a comfortable and 
non-violent future fathered their thoughts. They were willing to face 
the prospect of die progressive inimiseration of the masses, worsening 
economic crises and, in the end, bloody revolution. The unlovelincss 
of these prospects, and die fact diat diey were being faced, cstabhshed 
die Marxist as the profound reahst, die man who was entirely with- 
out illusion. This evident realism was reinforced by moral passion. 
‘The religious quality of Marxism . . . explains a characteristic atti- 
tude of the orthodox Marxist toward opponents. To him, as to any 
believer in a faith, the opponent is not merely in error but in sin. 
Dissent is disapproved of not only intellectually but also morally.’* 
The man who argues -with a Marxist has always been assaulting a 
rock fortress with a rubber flail. 

Lasdy, it was always possible to dismiss those who beUeved Marx 
wrong as being guilty of a failure of understanding. Marx is not easy 
to imderstand. Those who thought him wrong had failed to do so. 
Thus one of Marx’s reasons for the capitalist crisis, as noted, was the 
tendency for the rate of profit to fall with con tinuing capital accu- 
mulation. Marx was as insistent on die importance of profit for 
investment and production as any president of the National Associa- 
tion of Manufacturers. The falling rate of profit would lead to 
recurrent interruptions of expansion and these would be of increasing 
severity and duration. 

In diis century profits have shown no tendency to fall, and capital 
accumulation has continued apace. As a result, die declining rate of 
profit cannot be taken seriously as a cause of depression. One of 
Marx’s sympathetic modern interpreters lias been moved to conclude 
that ‘liis explanation of the falling tendency of profits explains 
nothing at all’.* But few Marxists make diis concession. Marx was not 

* Sdiumpeter, Cofitatism, Socutlism mi Democracy, p. 5. In the central tradition 
by contrast, such passionate belief was thought inconsistent with scientific ration- 
alism. Not exclusively, to be sure. Marx once observed with some justice that 
‘Economists are like dwologians. . . . Every religion other than their own is the 
invention of man, whereas dieir own particular brand of religion is an emanation 
from God.’ (From The Misery of Philosophy, quoted by Strachey, The Comins 
Stable for Power.) * Joan Robinson, An Essay on Marxim Economics, p. 42. 



in error; nor was it because he based his observation on the last 
century when the rate of return seemed to be showing a tendency to 
fall. Rather the dissenter has ^led to see the full subtlety and com- 
plexity of Marx’s argument. He has somehow over-simplified or 
vulgarized Marx’s position. 

Much has been written of the appeal of Marx— and, in somewhat 
the same vein, of communism— to intellectuals. How, in particular, 
can a doctrine that has so obviously acquired the standing of a dogma 
be attractive to inquiring, rational minds? The answer is a complex 
one. Apart from the obvious fact that Marx for Marxists is the con- 
ventional wisdom, there is the seeming realism, the certainty and 
security of the defenders and the large component of vivid truth. But 
much of Marx’s strei^th has always been in the contention of his 
followers that those who thought him wrong were really themselves 
obtuse, simple— or hteral-minded. These are terrible charges; in- 
numerable intellectuals have been unwilling to risk them. How mudi 
better to persuade oneself and others of one’s ability to see below the 
surface. This might mean agreeing that Marx meant what he did not 
say, but it was proof that one wasn’t incapably dull. Thus acceptance 
of Marx became not a matter of willingness to follow dogma into 
obvious umeahty and error. Rather it was a question of whether the 
individual was willing to adventure into the subtle and inverted as 
distinct firom the surface implications of Marx’s words, and had the 
ability to do so. For intellectuals die lure was strong. This too was a 
source of Marx’s influence. 


The time has come for a summing up. Up to twenty or twenty-five 
years ago— say the middle years of die thirdes— the broad impact of 
economic ideas is clear. It could not but leave a man with a sense of 
the depth, pervasiveness, and burden of the economic problem and, 
on the whole, with the improbability of a happy outcome. ’Depend 
on it,’ Dr. Johnson observed, ‘when a man knows he is going to be 
hanged in a fortnight, it concentrates his mind wonderfully.’^ For the 

^ The saying owes its modem fame to Winston Churchill, who noted that hi 
mind had been so focused by the prospect of the invasion of Britain in 1940. 



same reasons men’s minds were focused on the perils of economic life. 

In particular, although it was no longer the lesson of the central 
economic tradition that men would starve, neither was it the lesson 
that they would do very well. Privation was still normal. Men might 
lift themselves by lifting their marginal product; widi increasing 
efficiency and increasing supplies of capital, marginal productivity 
and hence wages might rise. But no one could suppose that the result 
could be more than bardy adequate. Certainly no one could suggest 
that any opportunity for such improvement could be overlooked. 
On the contrary, to relax such effort in the slightest would be ex- 
treme social dereliction. The privation, already great, would be 
greater— and unnecessarily so. The man of conscience and compas- 
sion must see that efficiency is increased by all possible means. To do 
less was to be profoundly callous, even cruel. 

Privation is also enhanced by the intransigent inequality of the 
income. The miserable consumption of the poor is partly the result 
of the ostentatious demands of the rich. There isn’t enough for both, 
and the latter get far more than diey need. If possible, something 
should be done about inequality, for no sensitive man could be in- 
different to the social strains and conflicts that it was producing and 
seemed likely to produce as the proletariat became increasingly con- 
scious of its inferior position. But could anything serious really be 
done about it? 

Finally, there was die nerve-racking problem of insecurity. The 
competitive model made episodic unemployment for the worker, 
and occasional insolvency for die firmer or businessman, a part of die 
system. This insecurity was enhanced by the growing severity of 
depressions and now in the thirties by the most devastating depres- 
sion of all. This latter was especially troublesome because the contem- 
porary theory dismissed it as selfcorrecting. If selfcorrecting it was 
inevitable, and if inevitable it was intolerable. 

Clearly there was much to bring productivity, inequality, and 
msecurity to the centre of men’s minds and to make them a pre- 
occupying concern. And if there was any tendency in the central 
tradition of economics to conclude that all might in the end work out 
for die best, diere were also voices from the wings to say it couldn’t 
be so. From the right was the echo of the Social Darwinists saying 



Struggle is not only inevitable but good. From the Marxist world, in 
tones of thunderous conviction, came the warning that the inequality 
and the insecurity would increase and increase until, in the end, their 
victims would destroy tlic whole edifice and, by implication, quite a 
few of its favoured inliabitaiits. 

These— -productivity, inequality, and insecurity —were tlic ancient 
preoccupations of economics. They were never more its preoccupa- 
tions than in the nineteen-thirties as the subject stood in a great valley 
facing, all unknowingly, a mountainous rise in well-being. We have 
now had that mountainous rise. In very large measure die older pre- 
occupations remain. Wc should scarcely be surprised. This pre- 
eminently is an occasion when wc would expect the conventional 
wisdom to lose touch witli the reality. It has not disappointed us. 

That is not to say tliat the change has had no effect on conventional 
attitudes. Especially on equality and insecurity there have been im- 
portant modifications. To these wc now turn. 




Few diings have been more productive of controversy over die ages 
than the suggestion that the rich should, by one device or another, 
share their wealth with diose who arc not. With comparatively rare 
and usually eccentric exceptions, the rich have been opposed. The 
grounds have been many and varied and have been principally noted 
for the rigorous exclusion of die most imporunt reason, which is the 
simple unwilUngness to give up die enjoyment of what they have. 
The poor have generally been in favour of greater equality. 

As the last chapters have shown, the economic and social pre- 
occupation with inequality is deeply grounded. In the competitive 
society— the society of the central tradition of economics in descent 
from Ricardo— there was presumed to be a premium on efficiency. 
The competent entrepreneur and worker were automatically re- 
warded. The rest, as automatically, were punished for their incom- 
petence or sloth. If labour and capital and land were employed with 
high efficiency then, pro tanto, nothing more, or not much more, 
could be got out of the economy in the short run by way of product. 
And longer-run progress did not necessarily benefit the average man ; 
in the original doctrine its fruits accrued to others. 

So if people were poor, as in fact they were, dieir only hope lay in 
a redistribution of income, and especially that which was the product 
of accumxilated wealth. Much though Ricardo and his followers 
mi^t dissent, there were always some— and the number steadily 
grew— who believed that redistribution might be possible. (Ricardo 
and those who followed him in die central tradition were never im- 
mtme from the suspicion that diey were pleading a special interest.) 




All Marxists took a drastic redistribution for granted. Consequently, 
tliroughout the nineteoith century the social radical had no choice 
but to advocate the redistribution of wealth and income by one 
device or another. If he wanted to change things this was his only 
course. To avoid diis issue was to avoid all issues. 

The conservative defence of inequality has varied. There has 
always been the underlying contention that, as a matter of natural 
law and equity, what a man has received save by overt larceny is 
rightfully his. For Ricardo and his immediate followers die luxurious 
income of landlords and of capitalists was the inevitable arrangement 
of things. One could tamper with it but only at die eventual price of 
disrupting the system and making the lot of everyone (including the 
poor) much worse. 

This was essentially the passive defence. With time (and agitation) 
the case for inequahty became a good deal more functional. The 
undisturbed enjoyment of income was held to be essential as an in- 
centive. The resulting effort and ingenuity would bring greater pro- 
duction and greater resulting rewards for all. Inequality came to be 
regarded as almost equally important for capital formation. Were 
income vndely distributed, it would be spent. But if it flowed in a 
concentrated stream to the rich, a part would certainly be saved and 

There were other arguments. Excessive equality makes for cultural 
uniformity and monotony. Rich men are essential if there is to be an 
adequate subsidy to education and the arts. Equality smacks of com- 
munism and hence of atheism and therefore is spiritually suspect. In 
any case, even the Russians have abandoned egalitarianism as un- 
workable. Finally, it is argued that by means of the income tax we 
have achieved virtual or (depending on the speaker) entirely exces- 
sive equaUty. The trend for the future must be toward restoring an 
adequate measure of inequality by well-conceived tax reductions 
affecting the upper surtax brackets. 

The cultural misfortunes foom excessive equality cannot be pressed 
too far. As Tawney observed: ‘Those who dread a dead-level of 
income or wealth ... do not dread, it seems, a dead-level of law and 
order, and of security of life and property. Ihey do not complain 
that persons endowed by nature with unusual qualities of strei^th, 



audacity, or cunning are prevented from reaping the full fruits of 
these powers.’^ And in fret in the conventional wisdom the defence 
of inequality does rest primarily on its functional role as an incentive 
and as a source of capital. 

Thus the egalitarianism of the present tax structure is thought to 
be seriously dampening individusd effort, initiative, and inspiration 
or is in dai^er of doing so. It ‘destroys ambition, penalizes success, 
discourages investment to create new jobs, and may wcU turn a 
nation of risk-taking entrepreneurs into a nation of softies . . Tt 

destroys the incentive of people to work It makes it increasingly 

difficult, if not impossible, for people to save. ... It has a deadening 
effect on the spirit of enterprise . . . which has made America.’® 

However, this case is not an impeccable one. Income taxes have 
been at present levels for approach^g two decades. These in general 
have been years of rapid economic growth. Those who view tlie 
taxes with most concern point to this progress with most pride. Nor 
would many businessmen wish to concede that they arc putting 
forth less than didr best efforts because of insufficient pecuniary 
incentive. The typical business executive makes his way to die top by 
promotion over the heads of his fellows. He would endanger his 
chance for advancement if he were suspected of goldbricking because 
of his resentment over his taxes or for any other reason. He is 
expected to give his best to his corporation, and usually he does. 

To give individuals large incomes to encourage savings also has 
elements of illogic. The rich man saves because he is able to satisfy 
all his wants and then have something over. Such saving, in other 
words, is die residual after luxurious consumption. This obviously is 
not an especially efficient way to promote capital formation. More- 
over, the empirical evidence on the effect of egalitarianism on capital 
formation is uncertain. England is often cited as an unfortunate 
example. But Norway, an even more egalitarian country, has had 
since the war one of the highest rates of capital formadon and of 

® R. H. Tawney, Equality (4th cd.; London, Allen & Unwin, 1952). P- 85- 

® ‘Taxes and America’s Future.’ Address by Fred Maytag II, before National 
Association of Manufacturers, December i, 1954. 

*"I 1 ie Relation of Taxes to Economic Growth.’ Address by Ernest L. Swigert, 
before National Association of ManuActurers, December 6, 1956. 


economic growth of any country in the non-communist world.’ 
Middle eastern countries where inequality is greatest are among 
those widi the lowest rate of capital formation. All or most gets 

The formal hbcral attitude toward inequality has changed little 
over the years. The liberal has partly accepted the view of the well- 
to-do that it is a trifle uncoutli to urge a policy of soaking the rich. 
Vet on the whole the rich man remains the natural antagonist of die 
poor. Economic legislation, above all tax policy, continues to be a 
contest between the interests of the two. No other question in eco- 
nomic policy is ever so important as the eflect of a measure on the 
distribution of income. The test of the good liberal is stiU that he is 
never fooled and that he never yields on issues favouring the wealthy. 
Other questions occupy liis active attention, but this is the constant. 
Behind liim, always challenging him, is die cynical Marxian whisper 
hinting that whatever he does may not be enough. Despite his 
efforts, capitahst concentration will keep on, and the wealdiy will 
become wealthier and more powerful. They lose battles but win 


However, few things are more evident in modem social history than 
the decline of interest in inequahty as an economic issue. This has 
been particularly true in the United States. And it would appear, 
among western countries, to be the least true of the United Kingdom. 
While it continues to have a large rituahstic role in the conventional 
wisdom of conservatives and liberals, inequality has ceased to pre- 
occupy men’s minds. And even the conventional wisdom has made 
some concessions to this new state of affoirs. 

On the fact itself— that inequahty is of declining concern— it is 
only necessary to observe that for some fifteen years no serious effort 
has been made to alter the present distribution of income. Although 
in the semantics of American Uberalism there is often a tactful silence 
on the point, since nothing so stin conservative wrath, the principal 
pubhc device for redistributing income is the progressive income tax. 

’ Alice Boutneuf, Norway: The Flamed Revival (Cambridge, Mass., Harvard 
University Press, 1958). 



Not since World War II has there been a major effort to modify this 
tax in the interest of greater equality. Loopholes have been opened 
and a few closed. Liberals have not, however, proposed any impor- 
tant new steps to make die tax more progressive and hence more 
egalitarian. And conservatives, while they have won numerous secon- 
dary victories, have not been able to mount any major attack on the 
tax itself. On die contrary, although roughly the present nominal 
surtax rates were put into effect during the war, widi die presump- 
tion that they were a temporary measure for insuring equality of 
wartime sacrifice, they are now regarded by many and perhaps by 
most people as permanent. 

As part of the present compromise, hberals do not seek to make 
current taxes more progressive or even passionately to eliminate 
existing inequities and loopholes in their appheation. They would, 
however, rally in opposition to any general reduction in rates on the 
higher income brackets. Those who believe the tax has gone too far 
in enforcing equality are more vocal. Appeals for public sympathy 
and support, and clarion calls for courage and action, come regularly 
from the well-to-do. ‘The hour is late, but not too late. There is no 
excuse for our hesitating any longer. Widi all the strength of equity 
and logic on our side, and with the urgent need for taking the tax 
shackles off economic progress, initiative is ours if we have the 
courage to take it.*^ But not even a conservative administration such 
as that of President Eisenhower thought it wise to tackle the question 
of surtax reduction on a wide front. 

Apart from the income tax almost no legislation has been enacted 
or even discussed in recent years which has as its main point the 
reduction of inequality. Fifty years ago, at the height of the debate 
over socialism and capitalism, it would have been hard to imagine 
there was any other issue. 

The decline in concern for inequality cannot be explained by the 
triumph of equality. Although this is regularly suggested in the con- 
ventional wisdom of conservatives, and could readily be inferred 
from the complaints of businessmen, inequality is still great. In 1955 
the one-tenth of families and unattached individuals with the lowest 
incomes received after taxes about one per cent of the total money 
^ Maytag, 'Taxes and America’s Future*. 




income of the country; the tenth with the highest incomes received 
27 per cent of the total, which is to say their incomes averaged 
27 times as much as the lowest tenth. The half of the households with 
the lowest incomes received, after taxes, only 23 per cent of all 
money income. The half with the highest incomes received 77 per 
cent. In 1954 only about three per cent of all families had incomes 
before taxes of more than $15,000. They received, none the less, 
per cent of total income. At the other extreme, i6’7 per cent had 
before tax incomes of less than two thousand and received only 
3*6 per cent of the income.^ Vast fortunes are still being made out of 
natural resources and especially out of oil— where the famous deple- 
tion allowance of 27*5 per cent effectively frees that proportion of oil 
income, and sometimes much more, from all taxation. Present laws 
are also notably favourable to the person who has wealth as opposed 
to the individiul who is only earning it. With a htde ingenuity, the 
man who is already rich can ordinarily take his income in the form 
of capital gains and limit his tax liability to 25 per cent of his income. 
In addition, unlike the man who must earn, he is under no compul- 
sion to acquire a capital stake, either for old age, family, or the mere 
satisfaction it brings, since he already has one. Accordingly he need 
not save. Yet none of these matters arouses the kind of concern wliich 
leads to agitation and action. 


The first reason why inequality has &ded as an issue is, without much 
question, that it has not been showing the expected tendency to get 
worse. And thus the Marxian prediction, which earlier in this century 
seemed so amply confirmed by observation, no longer inspires the 
same depth of fear. It no longer seems likely that the ownership of 
the tangible assets of the republic and the disposal of its income will 
pass into a negligible number of hands despite the approving senti- 
ment of those who would abandon the progressive income tax or 

^ U.S. Depattmmt of Commerce. Statistical Abstract of the United States, 1957, 
p. 309. The after-tax percentage distributions ate ffom Board of Governors of the 
Federal Reserve System and are based on the surveys of consumer finances. The 
before-tax data are estimates by the Department of Commerce. 



widen its present loopholes. Meanwhile, there has been a modest 
reduction in the proportion of disposable income going to those in 
the very highest income brackets and a very large increase in the pro- 
portion accruing to people in the middle and lower brackets. While 
ta x es have restrained the concentration of income at the top, full 
employment and upward pressure on wages have increased well- 
being at the bottom. In 1928 disposable income, i.e. income after 
taxes, of the i per cent of the individuals with the highest income was 
estimated to account for 19 per cent of all income. By 1946 it 
accounted for a little less than 8 per cent. In 1928 die 5 per cent with 
the highest incomes received over a third of all income; by 1946 
their share was about 18 per cent.^ The war and post-war years, 
especially, were a time of rapid improvement for those in the lower 
bracket. Between 1941 and 1950 the lowest fifth had a 42 per cent 
increase in income; the second lowest fifth had an increase of 37 per 
cent. The detailed figures for these years are as follows: 


[In dollars of 1930 purchasing power)* 

1941 1950 

$ $ 

Per cent dusnge 

Lowest fifth of all families 




Second lowest 




Third lowest 




Second highest 







+ 8 

Highest 5 per cent 



— 2 

Emulation or, when this is frustrated, envy have loi^ played a 
large role in the economist’s view of human motivation.® So long as 
one individual had more than another, the second was presumed to 
be dissatisfied with his lot. He strove to come abreast of his more 

® The data are &om National Bureau of Economic Rescardi. Note that these 
figures are not for households but for individuals. 

® From Selma Goldsmith, Geoi^ Jaszi, Hyman Kaitz, and Maurice Liebenberg, 
‘Size Distribution of Incomes since the Mid-thirties.* Review of Economics and 
Statistics, vol. XXXVI (February 1954). 

» Chapter XI. 



&voure(l contemporary; he was deq>ly discontented if he £uled. It 
may be, however, that these disenchanting traits are less cosmic than 
has commonly hem supposed. Envy almost certainly operates effi- 
ciently only as regards nearby neighbours. It is not directed toward 
the distant rich. Hoice, at a time when the individual's real income is 
rising, the £ict that imknown New Yorkers or Texans are exceed- 
ingly wealthy is not, probably, a matter of prime urgmcy. It becomes 
easy, or at least convenient, to accept die case of the conventional 
wisdom which is that the rich in America are highly functional and 
also much persecuted members of the society. Moreover, as noted, to 
commit on the wealth of the wealdiy, and certainly to propose that 
it be reduced, has come to be considered bad taste. The individual 
whose own income is going up has no real reason to incur the oppro- 
brium of this discussion. Why should he identify himself, even 
remotely, with soapbox orators, malcontoits, agitators. Commun- 
ists, and other undesirables? 

Things would be different were the incomes of the well-to-do 
rising and those of the rest of the people stationary or filing. This 
has been well illustrated by die reactions of the fumers who, though 
in many cases not badly off by past standards, during the middle 
fifties sudered a reduction of their income at a time when the incomes 
of nearly all other groups were rising. They were not reconciled 
either to their fate or to a Secretary of Agriculture who sought its 


Another reason for the decline in interest in inequality, almost cer- 
tainly, is the drastically altered polidcal and social position of die ridi 
in recent times. Broadly speaking, there are three basic benefits firom 
wealth. First is the satisfaction in the power with which it endows die 
individual. Second is the physical possession of the things which 
money can buy. Third is the distinction or esteem that accrues to the 
rich man as the result of his wealth. All of these returns to wealth 
have been gready circumscribed in the last fifty years and in a 
maimer which also vasdy reduces the envy or resentment of the well- 
to-do or even the knowledge of their existence. 

As rec^dy as a half-century i^o the power of the great business 



firm was paramount in the United States and so, accordingly, was the 
power of the individual who headed it. Men like Morgan, die Rocke- 
feller executives, Hill, Hairiman, and Hearst had great power in the 
meaningful sense of the term, which is that they were able to direct 
the actions and command the obedience of coundcss other indi- 

In the last half-century the power and prestige of the United States 
government have increased. If only by the process of division, this 
has diminished the prestige of the power accruing to private wealth. 
But, in addition, it has also meant some surrender of audiority to 
Washington. Furthermore, trade unions have invaded the power of 
the entrepreneur from another quarter. But most important, the 
professional manager or executive has taken away firom the man of 
wealth the power that is implicit in running a business. Fifty years 
ago Morgan, Rockefeller, Hill, Harriman, and the others were the 
undisputed masters of the business concerns they owned, or it was 
indisputably in their power to become so. Their sons and grandsons 
stiU have the wealth, but with rare exceptions the power implicit in 
the running of the firm has passed to professionals. Nor has any 
equivalent new generation of owning entrepreneurs come along. 

Wlieii the rich were not only rich but liad the power that went 
with active direction of corporate enterprise, it is obvious diat wealth 
had more perquisites than now. For the same reasons it stirred more 
antagonism. J. P. Morgan answered not only for his personal wealth 
but also for the behaviour of the United States Steel Corporation 
which he had put together and which he ultimately controlled. As a 
man of corporate power he was ako exceedingly visible. Today 
shares of the United States Steel Corporation are still the foundation 
of several notable fortunes. But no sins of the Corporation are visited 
on these individuak, for they do not manage the company and 
almost no one knows who they are. When the power that went with 
active business direction was lost, so was the hostility. 

The power that was once joined with wealth has been impaired in 
a more intimate way. In 1194 the crusading knight, Henry of 
Champagne, paid a visit to the headquarters of the Assassins at the 
castle at al-Kahf on a rugged peak in the Nosairi Mountains. The 
Assassins, though a fanatical Moslem sect, had, in general, been on 


good terms with the Christians, to whom they often rendered, by 
arrang emen t, the useful service of resolving disputes by eliminating 
one of the disputants. Henry was sumptuously received. In one of the 
more impressive entertainments a succession of the loyal members 
of the cidt, at a word from the Sheik, expertly immolated them- 
selves. Before and ever since, the willing obedience of a household 
coterie has been a source of similar satisfrction to those able to com- 
mand it. Wealth has been the most prominent device by which it 
has been obtained. As may indeed have been the case at al-Kahf, it 
has not always endeared die master to the men who rendered it. 

• In any case, such service requires a reservoir of adequately obedient 
or servile individuals. The drying up of this reservoir, no less than the 
loss of wealth itself, can rob wealth of its prerogatives. The increase 
in the security and incomes of Americans at the lower income levels 
has effectively reduced— indeed, for many purposes, eliminated— the 
servile class. And again the reciprocal is that those who no longer 
work for the rich (or who have done so or who fear that they might 
be forced to do so) no longer feel the resentment which such depen- 
dence has induced. 


The enjoyment of physical possession of things would seem to be one 
of the prerogatives of wealth which has been little impaired. Pre- 
sumably nothing has happened to keep the man who can afford them 
from enjoying his Rembrandts and his home-grown orchids. But 
enjoyment of things has always been intimately associated with the 
diird prerogative of wealth which is the distinction that it confers. In 
a world where nearly everyone was poor, this distinction was very 
great. It was the natural consequence of rarity. In England, it is 
widely agreed, the ducal families are not uniformly superior. There 
is a roi^hly normal incidence of intelligence and stupidity, good 
taste and bad, and morality, immorality, homosexuality, and incest. 
But very few people are dukes or even duchesses, althougli the latter 
have become rather more frequent with the modem easing of the 
divorce laws. As a result, even though they may be intrinsically un- 
exceptional, they are regarded vtuth some awe. So it has long been 



with the rich. Were dukes numerous, their position would deteri- 
orate. As the rich have become more numerous, they have inevitably 
become a debased currency. 

Moreover, wealth has never been a sufficient source of honour in 
itself. It must be advertised, and the normal medium is obtrusively 
expensive goods. In the latter part of the last century in die United 
States this advertisement was conducted with virtuosity. Housing, 
equipage, female adornment, and recreation were all brought to its 
service. Expensiveness was keenly emphasried. ‘We are told now 
that Mr. Gould’s “ $500,000 yacht” has entered a certain harbour, or 
that Mr. Morgan has set off on a journey in his “ $100,000 palace 
car”, or that Mr. Vanderbilt’s “ $2,000,000 home” is nearing com- 
pletion, with its “$50,000 paintings” and its “$20,000 bronze 
doors’’.’^ The great houses, the great yachts, the great balls, the 
stables, and the expansive Jewel-encrusted bosoms were all used to 
identify the individual as having a claim to the honours of wealth. 

Such display is now pass^. There was an adventitious contributing 
cause. The American well-to-do have long been curiously sensitive 
to fear of expropriation— a fear which may be related to the tendency 
for even the mildest reformist measures to be viewed, in the conser- 
vative conventional wisdom, as the portents of revolution. The 
depression and especially the New Deal gave the American rich a 
serious fright. One consequence was to uffier in a period of marked 
discretion in personal expenditure. Purely ostentatious outlays, 
especially on dwellings, yachts, and females, were believed likely to 
incite the masses to violence. They were rebuked as unwise and im- 
proper by the more discreet. It was much wiser to take on the pro- 
tective coloration of the useful citizen, the industrial statesman, or 
even the average guy.* 

* Matthew Josephson, The Robber Barons (New York, Harcoort, Brace & Co.’ 
1934), p. 330. Josephsoa is paraphrasing W. A. CroiTut, Conunodore Vanderbilt’s 
biographer, writing in 1885. 

* Cf. C. Wright Mills, The Power Elite (New York, Oxford University Press, 
1956), p. 1 17. Mr. Mills suggests that in the depression years this effort to provide 
protective coloration led to the recruiting of technicians and corporate managers 
as front men behind which the well-to-do could survive in peace. Not uncharac- 
teristically, I tbinlr, Mr. Mills reads too much design and contrivance into such 



However, deeper causes were at work. Increasingly in the last 
quarter-century die display of expensive goods, as a device for sug- 
gesting wealth, has been condemned as vulgar. The term is precise. 
Vulgar means: ‘Of or pertaining to the common people, or to the 
common herd or crowd.’ And this explains what happened. Lush 
expenditure could be afforded by so many that it ceased to be useful 
as a mark of distinction. A magnificent, richly upholstered, and ex- 
tremely high-powered car conveys no impression of wealth in a day 
when such cars are mass-produced by the thousands. A house in 
Palm Beach is not a source of distinction when the rates for a thou- 
sand hotel rooms in Miami Beach rival its daily upkeep. Once a 
sufSciendy impressive display of diamonds could create attention 
even for die most obese and repellent body, for they signified mem- 
bership in a highly privileged caste. Now the same diamonds are 
afforded by a television star or a talented harlot. Modem mass com- 
munications, especially the movies and television, ensure that the 
populace at large will see the most lavish caparisoning on die bodies 
not of the daughters of die rich but on the daughters of coal-miners 
and commercial travellers, who struck it rich by their own talents or 
some facsimile thereof. In South America, in the Middle East, to a 
degree in socialist India, and at Nice, Cannes, and Deauville, osten- 
tatious display by the rich is still much practised. This accords with 
expectadons. In these countries most people are sdll, in the main, 
poor and unable to afford the goods which advertise wealth. There- 
fore ostentation continues to have a purpose. In not being accessible 
to too many people it has not yet become vulgar. 

The American of wealth is not wholly without advantages in his 
search for distinction. Wealth still brings attention if devoted to cul- 
tural and technical pursuits or to hobbies with a utilitarian aspect. 
A well-to-do American may gain in esteem &om an admirably run 
farm, although never from an admirably manicured estate. He will 
be honoured for magnificent and imaginative cow stables, although 
not fi>r luxurious horse stables. Although wealtii aids a public career 
those who too patently rely on it are regarded as slightly inferior 
public citizens. A Harriman or a Lehman who is elected to public 
office enjoys a prestige fer in excess of an Aldrich or a Whitney whose 
appointment to an ambassadorial position, however justified on 



merit, might have been less certain in the absence of sizeable campaign 
contributions. In sum, although ostentatious and elaborate expendi- 
ture, in conjunction with the wealth that sustained it, was once an 
assured source of distinction, it is so no longer. The effect on attitudes 
toward inequaHty will be evident. Ostentatious expenditure focused 
the attention of die poor on the wealth of the wealthy, for this of 
course was its purpose. With the decline of ostentation, or its vulgar- 
ization, wealth and hence inequaHty were no longer flagrantly adver- 
tised. Being less advertised they were less noticed and less resented. 
The rich had helped to make inequaHty an issue. Now they were no 
longer impelled to do so. 

There were similar consequences from the flict that the rich man 
now had to compete for esteem. Once the intellectual, poHtician, or 
man of general ambition saw the rich man achieve distinction with- 
out efibrt and in contrast with his own struggle. He reacted by help- 
ing to focus the resentment of the community as a whole. Now he 
saw the man of wealdi forced to compete for his honours. In this 
competition the rich man retained undoubted advantages, but he did 
not automatically excel. Nothing could operate more effectively to 
dry up the supply of individuals who otherwise wotild make an 
attack on inequaHty a career. By graduating into the ranks of the 
professional managers, and after making his way up through the 
hierarchy of the modem corporation, the ambitious man could ex- 
pect to compete on tolerably equal terms with the grandson of the 

It would be idle to suggest that the man of wealth has no special 
advantages in our society. Such propositions are the one-day wonders 
of the conventional wisdom, and those who offer them have a brief 
but breath-taking reputation as social prophets. This itself suggests 
that such findings assiiage some sense of guilt. But it does seem clear 
that prestige and power are now far more intimately identified with 
those who, regardless of personal wealth, administer productive 
activity. The Wgh corporate official is inevitably a man of conse- 
quence. The rich man can be quite inconsequential and often is. 




In the Ricardian world, as noted, progress required profits, and its 
fhnts accrued to the landlords. Economic advance— expanding out- 
put— did not ordinarily help the common man. His only hope lay in 
reforms that Ricardo and his followers would have considered highly 
destructive or, alternatively, in a drastic overthrow of the system. 
Economic advance still holds litde promise of betterment for the 
average man in many if not most countries. On Andean haciendas, 
in the Arab lands, and in India and China at least until recent times 
it mattered little to the man who tilled the land whether the product 
increased. His own share was minute; an increase in product is not 
important if aU but a minute fraction goes to someone else. And 
matters may be worse: any surplus over the barest need may be 
absorbed, as the result of an ad hoc revision of the rules, by the land- 
lord, merchant, or moneylender. This is still the Ricardian world, 
and in it the obvious hope for improvement Ues in a dif&rcnt distri- 
bution of income. For the same reason, until the share of the ordinary 
man in the product is increased, his incentive to increase production 
—to adopt better methods of cultivation, for example- is slight or 
nil. The people of the so-called backward countries have frequently 
heard firom their presumptively more advanced mentors in the eco- 
nomically more advanced lands that they should be patient about 
social reform, with all its disturbing and even revolutionary implica- 
tions, and concentrate on increasing production. It can be remarkably 
inappropriate advice. Reform is not something that can be made to 
wait on productive advance. It may be a prerequisite to such advance. 

In the advanced country, in contrast, increased production is an 
alternative to redistribution. And, as indicated, it has been the great 
solvent of the tensions associated with inequality. Even though the 
latter persists, the awkward conflict which its correction implies can 
be avoided. How much better to concentrate on increasing ouq>ut, a 
programme on which both rich and poor can agree, since it benefits 

That among those who might be subject to redistribution this 
doctrine has something approaching the standing of divine revelation 



is perhaps not entirely surprising. For many yean the relationship of 
businessmen to economists in the United States has been character- 
ized by a degree of waspishness. The economist has shown a pre- 
disposition to favour low tarifis, the income tax, the anti-trust laws, 
and quite frequently trade unions. This has made him, at the mini- 
miun, an inconvenient fiiend. But increased output as a substitute for 
greater equality has lately become the basis for a notable rapproche- 
ment, ‘ From a doUars-and-cents point of view it is quite obvious that 
over a period of years, even those who find themselves at the short 
end of inequality have more to gain from faster growth than firom 
any conceivable income redistribution.*^ 

Some have reacted with slightly more suspicion. Over the cen- 
turies those who have been blessed with wealth have developed 
many remarkably ingenious and persuasive justifications of their 
good fortune. The instinct of the hberal is to look at these explana- 
tions with a rather unyielding eye. Yet in this case the facts are 
inescapable. It is the increase in output in recent decades, not the 
redistribution of income, which has brought the great material in- 
crease, the well-being of the average man.* And, however suspi- 
ciously, the liberal has come to accept the fact. As a result, die goal 
of an expanding economy has also become deeply embedded in the 
conventional wisdom of the American left. The beneficent effects of 
such an economy, moreover, are held to be comprehensive. Not only 
will there be material improvement for the average man, but there 
will be an end to poverty and privation for all This latter, in fact, 
is suspect. Increasing aggregate output leaves a self-perpetuating 

* ‘Leatning to Multiply and to Divide.’ Address by R.oger M. Blough, Chair- 
man of the Board of the United States Steel Corporation, quoting Professor 
Henry C. Wallich of Yale University, January 15, 1957. 

* hi the 1900-9 employed workers as a class received an estimated 55 per 

cent of all income. By the decade of 1930-9 it had increased to 67 per cent since 
which time it has evidently been more or less stable. A 67 instead of a 5$ per cent 
share of the total income paid out in the first decade would not have meant a very 
great inrrr^ |u» , On the other hand a 55 per cent share of present income would still 
be a huge advance over what workers received in the first decade. Calculations are 
from Gale Johnson, ‘The Functional Distribution of Income in the United States, 
1850-1952’, Review of Economics and Statistics, vol. XXXVI (May i 954 }- The 
estimates are rough. 


marg in ofpovcTfy at die very base of die income pyramid. This goes 
largdy unnoticed, because it is the fate of a voiceless minority. And 
liberals have long been accustomed to expect die poor to speak in the 
resoimding tones of a vast majority. To these nutters it will be neces- 
sary to return. 

For the moment we need only notice that, as an economic and 
social goal, inequality has been declining in urgency, and this has had 
its reflection in the convmtional wisdom. The decline has been for a 
variety of reasons, but in one way or another these are all related to 
the fact of increasing production. Production has eliminated the more 
acute tensions associated with inequality. And it has become evident 
to conservatives and liberals alike that increasing aggregate output is 
an alternative to redistribution or even to die reduction of inequality. 
The oldest and most agitated of social issues, if not resolved, is at least 
largely in abeyance, and the disputants have concentrated their 
attention, instead, on the goal of increased productivity. This is a 
change of far-reaching importance. Our increased concern for pro- 
duction in modem times would be remarkable in itself. But it has 
also pre-empted die field once occupied by those who disputed over 
who should have less and who should have more. 



Economic Security 

Few matters having to do with economic life have been so much 
misundexstood as the problem of economic security. And in remark- 
able degree the misiuiderstanding persists. 

In the model of the competitive society sudi insecurity was inher- 
ent. The individual producer or worker might, at any time, suffer a 
sudden decline in his fortunes. This could be the result of laziness or 
incompetence which would lose him his customers or his job. But the 
best of men might suffer from a sudden change in consumer tastes or 
as the result, not of their own inadequacy, but of that of their em- 
ployer. These impredictablc changes in fortime were both inevitable 
and useful. They were inevitable, for they were part of the capacity 
of the system to accommodate itself to change. As requirements and 
wishes changed, men were employed in new places and disemployed 
in the old. Capital was sought in the new industries and written off* 
as a loss in the old. The insecurity was useful, for it drove men— 
businessmen, workers, the selfremployed— to render their best and 
most efficient service, for severe punishment was visited impersonally 
on those who did not. 

However, this insecurity, valuable though it seemed in principle, 
was cherished almost exclusively either in the second person or in the 
abstract. Its need was thought urgoit for inspiring the efforts of other 
persons or people in general. It seldom seemed vital for the individual 
himself. Restraints on competition and the free movement of prices, 
die principal source of uncertainty to business firms, have been 
principally deplored by university professors on lifetime appoin^• 
ments. Such security of tenure is deemed essential for finitful and 



unremitting thought. The preoccupation of worken with unemploy- 
ment insurance or old age pensions has usually seemed most supine 
and degenerate to business executives who would be unattracted by 
companies in which they were subject to arbitrary discharge or which 
lacked adequate pension arrangements. Farmers have been regularly 
reproached for their lack of fealty to the free price system by entre- 
preneurs whose own prices have not been changed for some years. 

In the conventional wisdom of conservatives, the modem search 
for security is regularly billed as the greatest single threat to economic 
progress. These fears have been strongest at a time when great ad- 
vances in social security were coinciding with great economic pro- 
gress. Among liberals the prospect for finding new forms of social 
protection with wide appeal to the masses remains the highest hope 
both for social progress and for political preferment. When liberals 
in the United States deplore, as they regularly do, their lack of new 
ideas, they have reference, almost invariably, to the lack of new and 
pohticaUy attractive forms of social security. Tliis is disconcerting to 
conservatives who also suppose that an endless number of new ideas 
for protecting the individual from economic misfortune are lurking 
just around the comer. Yet in fact there have been few really new 
proposals for many years. 


The first step in penetrating this bedlam is to recognize that while 
risk was indeed inherent in the economic society of die central tradi- 
tion, it has long been regarded with equanimity by almost no one. 
And all who were subject to insecurity sooner or later set about 
eliminating it as it adccted themselves. In large measure they were 
successful. The devices by which they did so have varied much. This 
has led those who were using one device to sec it as a necessary pre- 
caution while they deplored the iniquitous measures devised by 
others. And, as will by now be scarcely surprising, while insecurity 
was eliminated in the real world, it survived more or less intact in the 
ideological imderpinning of the conventional wisdom and continued 
therein to play its all but indispensable role. 

The elimination of economic insecurity was pioneered by the 



business firm in respect of its own operations. The greatest source of 
insecurity, as noted, lay in competition and the free and unpredictable 
movement of competitive market prices. From the very beginning 
of modem capitalist society, businessmen have addressed themselves 
to the elimination or the mitigation of this source of inseairity. 
Monopoly or the full control of supply, and hence of price, by a 
single firm was the ultimate security. But there were many very 
habitable halfway houses. Price and production agreements or cartels, 
price-fixing by law, restrictions on entry of new firms, protection by 
tariffs or quotas, and many other devices have all had the effect of 
mitigating the insecurity inherent in the competitive economy. Most 
important, where the number of firms is small, a characteristic fea- 
ture of the modem industry, interdependence, is recognized and re- 
spected, and firms stoutly avoid price behaviour whicli would 
enhance uncertainty for all. 

These efforts have been long and widely remarked. However, the 
tendency of tlicsc measures to focus directly or indireedy on price, 
which, as stated, is the greatest somce of uncertainty, has led econo- 
mists to regard the management of prices as being of unique impor- 
tance. And they have far more fi*equaitly related such management 
to the maximization of profits than to the minimization of risks. The 
spectre that has haunted the economist has been the monopoly seek- 
ing extortionate gains at die public expense. This has dominated his 
thoughts. The less dramatic figure, the businessman seeking protec- 
tion from the vicissitudes of the competitive economy, has been 
much less in his mind. That is unfortunate, for die development of 
the modem business enterprise can be understood only as a compre- 
hensive effort to reduce risk. It is not going too &r to say that it can 
be understood in no other terms. 

Specifically, it fidls within the power of the modem large corpora- 
tion to mitigate or eliminate (with one exception) every important 
risk to whidi business enterprises have andendy been subject. Con- 
sumer taste and demand may shift. The modem large corporation 
protects itself by its advertising. Consumer taste is thereby brought 
at least partly under its control. Size makes possible a diversified Ihie. 
This provides further protection. There is danger that technological 
change will render obsolete a product or method of production. The 



modem corporation is able, through its research and technological 
resources, to ensure that it vnll be abreast of such change. Therefore 
technological change will occur imder its own auspices or within its 
reach. A measme of control over prices means a measure of control 
over earnings. This means at least partial independence of the capital 
market for funds. Ske, moreover, greatly diversifies the opportunities 
of the firm in raising money. In the large organization even die risks 
associated with the selection of leadership are reduced. Organization 
replaces individual authority; no individual is powerful enough to do 
much damage. Were it otherwise, the stock market would pay close 
attention to retirements, deaths, and replacements in the executive 
ranks of the large corporations. In fact, it ignores such details in tacit 
recognition that the organization is independent of any individual.* 

The massive reduction in risk that is inherent in the development 
of the modem corporation has been fir from fully appreciated. Tliis 
is pardy because the corporation, unlike the worker, farmer, or other 
individual citizen, has been able to reduce its insecurity without 
overdy seeking the assistance of government. It has required ela- 
borate organization, but this has been the product of continuous 
evolution from the original entrepreneurial enterprise. Farmers, 
workers, and other dtizms, by contrast, have had to seek the assis- 
tance of government or (as in the case of the unions) they have had to 
organize specially for the purpose of reducing insecurity. Conse- 
quendy their search for greater seciuity has been notorious. By con- 
trast the corporate executive, whose concern pioneered the escape 
j&om insecurity, has been able to suppose that security is something 
with which only workers or krmers are preoccupied. 

Myth has also played a part in concealing the efibrt of the modem 
corporation to minimize insecurity. There is a remarkable convic- 
tion, even on the part of the executives of the largest business corpora- 
tions, that they live dangerously. As diis is written, no large United 
States corporation, which is aho large in its industry, has filled or 
been seriously in danger of insolvency in many years. The security of 
tenure of corporation executives is remarkably high. So is their 
remuneration. Certainly these bear no resemblance to the insecurity 

* Tliese are matters which I hope to treat in much greater detail in a forthcomii^ 
book on the corporation and the corporate personality. 



of the fortunes of the business entrepreneur of the competitive model. 
Individual decisions of corporate management may still turn out to 
have been wrong. But in the large, diversified corporation— in con- 
trast widi the small and more specialized firm— such decisions are 
rarely fatal. 

The riskiness of modem corporate life is in fact the harmless con- 
ceit of the modem corporate executive, and it is vigorously pro- 
claimed. Precisely because he lives an orderly and careful life the 
executive is moved to identify himself with the dashing entrepreneur 
of economic literature. For much the same reason, the co mm ander 

of an armoured division, travelling in a trailer and concerning him- 
self with petrol supplies, sees himself as leading an old-time cavalry 
charge. Nothing has been more central to the purpose of General 
Motors or General Electric than to encompass and eliminate the 
perils to which the one-time entrepreneur was presumed to be sub- 
ject. Nothing would be more damaging to an ^ecutive reputation in 
General Motors or General Electric than to laimcli a product without 
testing the market, to be caught napping by a technological develop- 
ment, to be unprotected on one’s raw-material supply or to be caught 
in a foolish price war. These were once the commonplace risks of 

But the large corporation has been only the leader in the retreat 
firom risk. Nearly everyone else has participated to the best of his 
ability and ingenuity, and in the thirties there was an especially wide- 
spread efibrt to mitigate the economic perils of the average man. The 
federal government intervened fi>r tlic first time with relief and 
welfare funds to protect the individual from economic misfortune. 
This was followed by social security— unemploymait insurance and 
old age and survivor’s pensions. Farmers, through public payments 
and support prices, were protected fix)m some of the insecurity 
associated wi^ competitive market prices. The unions developed 
rapidly during this decade. Along with their redress of bargaining 
power, diey provided the worker with protection against capricious 
or adventitious firing or demotion and thus increased his security in 
his job. Even the smaller businessman, through the Robinson- 
Patman Act, the Fair Trade laws, legislation against bclow-cost 
selling, and dirough trade associations, won a measure of security 



from the uncertainties of market competition for which he shared 
tlie universal distaste. 

The foregoing measures were micro-cconomic. They protected 
the individual, firm, or group from the specific adversities to which 
it was subject. But the effective mitigation of insecurity required 
another and parallel effort of a far more general sort. The position of 
the worker who is protected against arbitrary firing by a sound 
seniority system is far from ideal if he receives an entirely non-dis- 
criminatory discliarge as die result of an insufficiency of demand for 
the product he is making. This is especially so if a general shortage of 
demand keeps liim from finding a job elsewhere. While unemploy- 
ment compensation is better than nothing, a job is better than either. 
Even with an effective enforcement of the laws preventing price 
discrimination— roughly the use by a large firm of its size to exact 
and offer prices which small competitors cannot obtain or quote— 
the competitive position of the small retailer in a time of depression 
is not happy. Regardless of die conditions of competition, it is much 
better when the demand for everyone’s product is good. Farm sup- 
port prices are a useful protection against sudden adverse price move- 
ments. But a demand for farm products that holds such prices reliably 
above support levels will be preferred by every rational farmer. 

At a time, as during the thirties, when there was great interest in 
the micro-cconomic measures to increase security, it would have 
been surprising indeed had there been no macro-economic effort 
with its greater efficiency to the same end. The two efforts would be 
in the highest degree complementary. In fact, the reduction of 
insecurity by macro-economic measures was central in the economic 
policy of the time. Efforts to eliminate or mitigate the business cycle 
and to stabilize the economy at a level where the labour force would 
be more or less fully employed were a principal goal of public policy. 
Then, as since, economic stabilization was regarded as an end in itself, 
but it will now be dear that it was only one part of the broad effort 
to escape the insecurity which was assumed to be inherent in econo- 
mic lifo. The change in attitudes on macro-economic security during 
the thirties was remarkable. At the beginning of the decade it was 
almost uniformly assumed that cyclical fluctuations with accompany- 
ing price and employmoat uncertainties were inevitable. It was hoped 



by many that they would not be violent. But there was no general 
confidence that depressions could be tempered by government action 
without the risk either of eliminating the self-corrective features of 
the cycle or simply making things worse. By the end of the decade, 
under the combined influence of Keynes and the sanguine and experi- 
mental mood generated by the New Deal, there was a widespread 
belief that dq>ressions could be at least partially prevented. The 
notion that they must be allowed to run their course was virtually 


These measures to enhance security in the thirties, the micro-econo- 
mic and the macro-economic together, were numerous and massive 
in their effect, and diey were concen trated in die brief span of a few 
years. (While it is convenient to speak of a decade, most of the drive 
for increased economic security occurred in the five years from 1933 
to 193 8.) Conservatives and liberals alike looked at the measures, and 
at the mass approval they evoked, and concluded that something new 
and different had been added in economic motivation. Conservatives 
struggling, however unconsciously, to reconcile this drive for secur- 
ity with die inherent and seemingly indispensable insecurity of the 
competitive society were profoundly alarmed. For perhaps the first 
time in history they worried not about the turbulent ambitions of the 
masses but about their yearning for peace and contentment. Liberals, 
observing the poHtical magic in this desire for security, accepted it 
and rationalized it. Modem industrial fife, they concluded, was a 
thing of exceptional hazard; the worker lived in constant danger of 
being tom to pieces by the increasingly complex social machine 
which he served Given this image, it was possible to argue that he 
needed much more elaborate protection than in the simpler econo- 
mic society assumed by earlier economists. These economists could 
not have foreseen the risks of advanced industrial capitalism. With 
furdier advance ever more protection would be required. 

We are now able to see tihe matter in a clearer light. In the thirties 
the average man was simply showing the commonplace reaction to 
the insecurity of the competitive system. In doing so he was follow- 
ing a path that had been pioneered by the modem business firm. He 



was showing, as ever, that insecurity is something that is cherished 
only for others. 

It was inevitable that Airmen and workers in general would be the 
last to concern themselves with security. Before a man will try to 
protect himself Grom sudden changes in his economic fortune, he 
must have some fortune to protect. Businessmen were first to develop 
a stake in economic society. They were first, as a result to become 
concerned with means, expHcit or unrecognried, for safeguarding 
that stake. In the grim world of Ricardo and Malthus the ordinary 
citizen could have no interest in social security in the modem sense. 
If a man’s wage is barely sufficient for existence, he docs not worry 
much about the greater suffering of unemployment. Life is a heavy 
burden in cither case. Men who are engaged in a daily struggle for 
survival do not think of old age, for they do not expect to see it. 
When the nomial expectation of life is very low, sickness and death 
are normal hazards. A man of eighty does not take out life insurance. 
He reconciles himself as best he can to the prospect of death. To the 
landless worker in an Indian village, one of the world’s most luifor- 
tunate individuals, unemployment is not even a misfortune. It is his 
normal fortune. 

With increasing well-being all people become aware, sooner or 
later, that they have something to protect. In the very early stages of 
the evolution of a business concern, the entrepreneur is not much 
concerned with security. He has little equity to conserve. Only later 
do he or his descendants begm to talk about their responsibiUties to 
their stockholders. Henry Ford could gamble on the untested idea of 
producing in a single model the cheapest possible car for the people. 
It was a breath-taking step. His colleagues discouraged him, but he 
had nothing much to lose. His grandsons would indeed be derelict 
were they similarly to risk the present assets of the Ford Motor Com- 
pany. No criticism attaches to the effort of the modem corporation 
to minimize risk. It would be delinquent in its responsibilities if it 
failed to do so. It would be gambling where it could be sure. 

The development in the labour market is similar. As the real wage 
of the worker increases and also as employment becomes more cer- 
tain, unemployment and the absence of income acquires its contrast- 
ing horror. With increasing income it also becomes possible to think 


of old age: the individual expects to survive, and old age without 
income is differentiated, as it was not before, by the prospect of dis- 
comfort. And as health and physical hazard decline, men come to 
think of them as abnormal rather than normal afflictions. It is not the 
poor but the well-to-do farmers who find onerous the iinrprrai'nfi> 
of the market, hi the mountain country of Kentucky and Tennessee 
a depression is not a grievous hazard. Farmers have htde to sell; their 
property has small value. They are therefore little affected by declin- 
ing prices and not mucli concerned about declining property values. 

In the well-to-do regions things are different. In the nineteen-thirties 
it was the comparatively rich farmers of Iowa who threatened the 
judges who presided over foreclosure proceedings. From these farms 
came the demands for farm relief. Unlike those of the Appa la chian 
plateau, these farmers had something to lose. 

Thus the notion, so sanctified by the conventional wisdom, that 
the modem concern for security is the reaction to the peculiar 
hazards of modem economic life could scarcely be more in error. 
Rather it is the result of improving fortune— of moving from a 
world where people had little to one where they had much more to 
protect. In the fint world misfortune and suffering were endemic and 
unavoidable. In the second they have become episodic and avoid- 
able. And as they became episodic and avoidable, reasonable men 
saw the merit of measures to avoid them and the possibilities for 
so doing. 

Increased economic well-being was not the sole cause of the in- 
creased interest in economic security. Allowances must be made for 
diffrrences in national temperament and political development. These 
may well explain why a comprehmsive system of social insurance 
first appeared in Imperial Germany and why, in the non-Communist 
lands, it has had its greatest development in Scandinavia and the 
United Kingdom. The Great Depression which struck with especial 
severity in the United States and Canada greatly quickened the inter- 
est in economic security in these countries. 

The Great Depression has, in fact, often been dted as evidence of 
the growing insecurity of modem industrial life. There was, it is 
said, no comparable hazard before the Industrial Revolution. This, it 
will now be clear, is a superficial view. The Great D^ression was 



severe partly because there was so much wealth and income to lose. 
The hazard was greatest in the United States and Canada where the 
per capita wealth was greatest. And the depression stimulated concern 
for economic security in precisely the same way that a conflagration 
stimulates an interest in fire insurance and a flood in flood control. 
These also have an effect on individuals which is roughly proportion- 
ate to the amount of their property diat lies in the path of the flames 
or the water. 


Men of property— the Forsytes of the world— have always known 
that it is as important to safeguard their wealth as to increase it. But 
they have never equated the two. Property can be increased without 
hmit; the efforts to safeguard it are subject to sharply diminishing 
returns. Having insured against £re, theft, and high winds, a man has 
removed the major hazards to his possessions. Protection against 
eardiquakes and falling aeroplanes may also be worth while, but it is 
not of equal urgency and it does not bring an equivalent increase in 
peace of mind. 

The problem of economic security is much the same. There are 
more serious hazards and less serious ones; as the more serious are 
covered there will be a decHning sense of urgency about the less 
serious ones and indeed, also, about the entire problem of economic 
security. For the worker, in the past, the greatest hazard was the loss 
of his job and income. Thereafter, the uncertainties of old age, sick- 
ness, accident, and death may well have ranked next in importance. 
As and when these risks were mitigated, although others remained, 
none was of comparable importance. For die firmer protection 
against a severe decline in his prices was (and remains) ofparamoimt 
urgency. Such a decline threatens both his income and his assets. 
After that, depending on the region, come the dangers of drought 
and crop fiilure. There are no other hazards of similar importance. 
For the businessman the situation is much the same. The overwhelm- 
ing uncertainty concerns product prices and markets. This accounts 
for the attention it has received from economists, indeed why, in the 
theory of market behaviour, efforts to remove this d i mens ion of risk 
have been regarded as more or less unique and also, not infirequendy. 



as uniquely reprehensible. There are further hazards— those of cost 
movements, raw material supplies, labour relations— which it is 
desirable to eliminate, but their potential for damage is less devastat- 
ing. Other soittces of uncertainty are of still less importance. 

The meaning of this is that elimination of insecurity in economic 
hfe can be a finished business. Nothing is more completely accepted 
in the conventional wisdom than the chchc that economic life is end- 
lessly and inherently uncertain. In fact, the major uncertainties of 
pristine economic life (subject to a major qualification concerning the 
control of depressions) have already been ehminated. The ones that 
remain are of much reduced urgency. 

The corollary is that parties and governments cannot, as the con- 
ventional wisdom so devoutly assumes, go on ‘inventing’ new kinds 
of security. This would be possible were it merely a matter of inven- 
tion or were the hazards of modem economic life increasing. But die 
hazards are finite in number; they increase only in die sense that 
people have more to lose. This is not to say that no economic insecur- 
ity remains. For the average individual in the United States sickness 
—which may mean large expenditures at a time when there is no 
income— is a considerable hazard. Smaller business and agriculture 
are still economically insecure vocations. None the less, subject 
always to the major qualification that depressions arc to be prevented, 
the preoccupation with economic security is largely in the past. No 
hazards remain that are comparable in importance with those diat 
have been covered. And protection once achieved is quickly taken for 
granted. It ceases to be a matter for discussion or even of thought. 
Henceforth, in pursuing the goal of greater economic security, we 
will be completing and perfecting a structure that in all its major 
features now exists. 

One cannot stress too strongly, however, dut if economic security 
is to be considered finished business, or largely finished business, 
depressions, or even any serious failure to provide full employment, 
must be prevented. A depression could always break down the 
micro-measures that have so laboriously been erected by (or for) 
businessmen, worken, fermers, and other citizens for their protec- 
tion. Business arrangements for modifying and controlling com- 
petition in the interests of market stability then turn into cut-throat 



competition. Unemployment insurance becomes not a transitional 
protection for the worker who is changing jobs, but an inadequate 
livelihood. Farm price supports become low maximum rather than 
high minimum prices. The prevention of depressions remains the 
sine qua non for economic security. 


The desire for economic security was long considered the great 
enemy of increased production. This attitude was firmly grounded 
in the belief that the insecurity of the competitive model was essen- 
tial for efficiency. Along with the carrot of pecuniary reward must go 
the stick of personal economic disaster. Both were essential. To re- 
move the stick, which must be the consequence of increasing econo- 
mic security, would be to remove half the incentives by which men 
were inspired. This belief still has a considerable role in the conven- 
tional wisdom. The efforts of farmers to minimize uncertainty, 
although in many respects far less effective than those of larger cor- 
porations or trade unions, have inspired especial alarm. In tlie recent 
view of a leading agricultural economist, ‘When millions of able 
[farm] entrepreneurs have regained die self-confidence to operate 
without the social harness of bureaucratic guidance and universal 
risk insurance, it is an event that may amount to a decisive victory in 
the free, anti-collective world. But even in modem corporate life, 
the conventional wisdom gives great credit to the threat of adversity. 
‘The characteristic of European businessmen as a class as distin- 
guished from Americans is their complacency, their timidity, and 
their instinctive looking to each other and to government for pro- 
tection against the rude shocks of the contemporary world. And the 
thing they fear most is price competition.** 

^ Karl Brandt, * Agricultural Price Policy During Rearmament’, /ounia/ of Farm 
Economics, vol. XXXIV (May 1952), p. 198. Professor Brandt is a past president of 
the American Farm Economic Association. 

* Randall, A Creed for Free Enterprise, p. 23. Mr. Randall vm for many years an 
executive and after 1949 the very articulate president of the Inland Steel Company. 
In the steel industry overt price competition is virtually unknoivn, the elimination 
of this source of insecurity having been accomplished many years ago. But in the 
liturgy of the conventional vdsdom the piaisei of price competition are still 



Plainly, however, the notion diat economic inseciuity is essential 
for efficiency and economic advance was a major miscalculation— 
perhaps the greatest in the history of economic ideas. (It was the 
common miscalculation of both Marxian and orthodox economists. 
Marx and his followers were deeply persuaded that capitalism would 
be crippled by efforts to civilize it. To cite one obvious example, 
luiemployment compensation would ruin the operation of the indus- 
trial reserve army in regulating wages.) In fact the years of increasing 
concern for economic security have been ones of imparalleled ad- 
vance in productivity. Those spokesmen who have been most 
alarmed over the debilitating effects of the search for security have 
often remarked most breathlessly on the improvements in produc- 
tivity wliich have occurred at the same time. The economist whose 
views were just cited on the alarming dangers of ‘universal risk 
insurance’ in agriculture characteristically observed in die same paper 
diat, ‘During die last few decades, breath-taking technological evo- 
lution has been opening new frontiers in agriculture, and die pro- 
gress has been most spectacular in the United States and Canada. 
Not only did it assist gready in World War II, but it also kept mil- 
lions of people in Europe and Asia alive. . . Part of this techno- 
logical advance in agriculture may have been the result of price 
support legislation which reduced price and income imcertainty. 
Farmers were thus able to invest in new technology with increased 
confidence. But this notably plausible possibility has no standing 
in the conventional wisdom. Hence it is forthrighdy ignored. 

The data on what has happened to output in the age of security 
could scarcely be more impressive. In the twenty years prior to the 
nineteen-thirties, the decade when the concern for security first be- 
came a source of uneasiness, labour productivity— nation^ income 
produced per man-hour— increased from 89*6 cents in 1900 to 1 13 *3 
cents in 1929. This was a total of 23 *7 cents or at a rate of about i *2 
cents a year. In the ten years following the thirties the total increase 
was firom 131 *5 cents to I79’2 cents or by 47*7 cents. This was by an 
average of 4*8 cents a year or four times the amount of the earlier 

vigoroudy sung. As a result, it is strongly recommended even by those who have 
most successfully diminated it 

1 Brandt, ‘i^^ricultuial Price Policy Dutii^ Rearmament’, pp. 185-6. 



period. The increases continued in the decade of the fifties. Plainly 
the increased concern for security, so fiir fiom being in conflict with 
increased productivity, was consistent with a greatly accelerated rate 
of advance.^ The most impressive increases in output in the history 
of both the United States and other western countries have occurred 
since men began to concern themselves with reducing the risks of the 
competitive system. 

It must be repeated that in the conventional wisdom such empirical 
evidence is not necessarily decisive. The consequences truly depicted 
by the convoitional wisdom arc, it is held, lurking just out of sight. 
To respect the evidence is only to evince an imsubtle mind. Yet in 
this instance the reality is somewhat difficult to evade. Hie increase in 
economic security and the increase in economic product are accom- 
plished facts. The conflict between security and progress, once billed 
as the social conflict of the century, doesn’t exist. 


Not only is there no inconsistency between die mitigation of in- 
security and the increase of production, but the two are indissolubly 
linked. A high level of economic security is essential for maximum 
production. And a high level of production is indispensable for eco- 
nomic security. So compulsive, indeed, is the pressure to maintain 
output as a requisite of economic security that the economy is im- 
pelled to a level of performance which, as things now stand, it can 
sustain only with difliculty and at some cost and danger. But this is 
running ahead of the story. We must press a step further the relation 
fint of economic security to production and dien the reciprocal rela- 
tion of production to economic security. 

The major threat to production in our day is not, as the more 
nostalgic exponents of the conventional wisdom still so fondly ima- 
gine, the lazy and malingering workman or the imenterprising boss. 
These wastrels unquestionably exist. Payments designed to bridge 
periods of involuntary unemployment do provide modestly for some 

^ Estimates are in 1950 prices. Hiey are from America’s Needs and Resources, 
A New Survey, by J. Frederic Dewhurst and Associates (New York, Twentieth 
Century Fund, 1955), p. 40. 



wholly voluntary idleness in Plorida. We have feather-bedding 
unions and gold-bricking workmen and slodifiil supernumeraries 
everywhere. Indeed it is possible that die ancient art of evading work 
has been carried in our time to its highest level of sophistication, not 
to say elegance. One should not suppose that it is an accomplish- 
mait of any particular dass, occupation, or profession. Apart firom 
the universities where its practice has the standing of a scholarly rite, 
the art of genteel and elaborately concealed idleness may well reach 
its highest development in die upper executive reaches of die modem 

What is certain, however, is that the loss of production from this 
conventional and cherished shirking is small as compared with what 
can be lost firom the involuntary idleness of workers and the £a more 
ruthless fhistratiou of entrepreneurial initiative as the result of depres- 
sion. For the same reason the potential gain in production firom 
eliminating such involuntary idleness, and firom widening entre- 
preneurial opportunity by expanding markets, is far greater than 
anything that could be hoped for firom the most sweeping streng- 
thening of individual incentives resulting in the most radical in- 
crease in the willingness of individuals to work or expend executive 

Between 1929 and 1932 the Gross National Product, roughly the 
total production of the nation, expressed in constant (1950) dollars, 
dropped by ¥44 thousand million firom $157*8 to $113*6 thousand 
million. No diminution in the energy or initiative of workmen or 
their employers could have an efirct comparable with this massive 
increase in forced idleness by individuals who would have much pre- 
ferred to work. (Between 1929 and 1932 unemployment increased 
firom 1*55 million to 12*1 million; non-agricidtural employment 
decreased firom 35*1 million to 28*8 million.^) This was a demonstra- 
tion of hbtoric magnitude of the inefficioicy of depression. But there 
have been more modest if still striking demonstrations in more recent 
times. In late 1953 and 1954 there was a mild depression and in the 
latter year output was sliglitly below the previous year. ($360*5 
thousand million as compared with $364*5 thousand million. Prices 

^ Eemomk htdkators. Historical and Descriptive Supplement, 1935. Joint Com- 
mittee on the Economic Report. 



were the same.) Unemploymeat increasedl from 1*6 million in 1953 
to 3*2 million in 1954. If instead of this slight decline there had been 
the commonplace increase of immediately preceding years, and 
which the labour force could have sustained, production would have 
been about $20 thousand million greater. That was equal to nearly 
a diird of the aurent outlays of the federal government and ap- 
proached the total of all state and local outlays. This production was 
not missed and, indeed, its loss was little remarked. We shall see later 
that there were very good reasons for such equanimity— the goods 
so sacrificed were not, in fact, of high urgency. But die figures do 
show the ineflSciency of even the mildest depression. 

The immediate although not the ultimate cause of depression is a 
fiill in the aggregate demand— meaning in the purchasing power 
available and being used— for buying the output of the economy. 
Unemployment insurance means that a man’s purchasing power is 
protected when he loses his job. It falls, but no longer to zero. Thus 
a measure deseed to reduce die insecurity associated with unem- 
ployment also acts to counteract the loss of output— the economic 
ine£Bciency— associated with depression. And, to the confusion of the 
conventional wisdom, it acts on a central cause of inefficiency, one 
that is far more important than isolated malingering which unem- 
ployment insurance might conceivably have encouraged. 

This e&ct, of course, is not peculiar to unemployment insurance. 
Farm support prices, which force compensatory public outlays when 
farm prices, income, and purchasing power &11, have the same effect. 
So do public welfare payments. Old age and survivor’s insurance 
insure a modest but steady flow of purchasing power firom those who 
are no longer able to work. This flow is unaffected by an ebb in 
«:ononiic activity and thus acts as a stabilizing influence. In the 
aggregate these measures to minimize insecurity comprise a con- 
siderable part of what economists have come to call ^e ‘built-in 
stabilizers’ of the economy. Thus measures thought by the conven- 
tional wisdom to be hostile to productivity all support it at the most 
crucial point. 

But the reciprocal effect is equally dear and the pressures back of 
it are much more demanding. As noted above, a high levd of pro- 
duction is essential for the economic security of wotkers, farmers. 



and businessmen. With it there is a tolerable level of security for all. 
Without a high level of output, the micro-economic measures, in 
their present form at least, are only a second best. Moreover, although 
it has been a point in favour of unemployment compensation, old age 
pensions, and other measures for micro-economic security that they 
enhance economic stability, this has never been their central purpose. 
They have been centrally designed with the individual recipient in 

By contrast, to a very large degree in recent times increased output 
has been sought not for the goods involved but for the cdect on 
economic security. Whether we need or even wish the goods that are 
produced, their assured production means assured income for those 
who produce them. This serves the goal of economic security. 
Nothing else serves it so well. To ialter on production, even though 
that production serves the most unimportant of requirements, is to 
expose some individuals somewhere to loss of employment and in- 
come. This cannot be allowed. 

The fiicts here are a nutter of common observation. In the political 
life of western countries— the United States, the United Kingdom, 
and the older British Commonwealths— nothing counts so heavily 
i^ainst a government as allowing unnecessary unemployment. It is 
not the lost production that is mentioned. It is always the imemploy- 
ment. The remedy is, of course, more employment and higher pro- 
duction. Thus the effort to oihance economic security becomes the 
driving force behind production. 

The reader scarcely needs to be reminded of the point at which this 
essay has arrived. The ancient preoccupations of economic life— with 
equality, security, and productivity— have now narrowed down to a 
preoccupation with productivity and production. Production has 
become the solvent of the tensions once associated with inequality, 
and it has become the indispensable remedy for the discomforts, 
anxieties, and privations associated with economic insecurity. Here 
we have the explanation, or more precisely the beginning of the 
e3q>lanation, of a modem paradox: Why it is that as production has 
increased in modem times concern &r production seems also to have 
increased. Production has become the centre of a concern that had 
hithorto been shared with equality and security. For these reasons, 



and supported, we shall see, by an elaborately synthetic rein&rce- 
ment, it has managed at least superficially to retain the prestige which 
inevitably it had in the poor world of Ricardo. The nature of the 
present preoccupation with production, and the devices by which 
this preoccupation is sustained, are the next order of business. 



The Paramount Position of Production 

In the autumn of 1954, during the Congressional elections of that 
year, the Republicans replied to Democratic attacks on their steward- 
ship by arguing that this was the second best year in history. It was 
not, in all respects, a happy defence. Many promptly said that second 
best was not good enough— certainly not for Americans. But no 
person in either party showed the slightest disposition to challenge 
the standard by whi^ it is decided that one year is better dian an- 
other. Nor was it felt that any explanation was required. No one 
would be so eccentric as to suppose that second best meant second 
best in the progress of the arts and the sciences. No one would 
assume that it referred to health, education, or the battle against 
juvenile delinquoicy. There was no suggestion that a better or poorer 
year was one in which the chances for survival amidst the radioactive 
fomiture of the world had increased or diminished. Despite a marked 
and somewhat ostensible preoccupation with religious observances at 
the time, no one was moved to suppose that 1954 was the second best 
year as measured by the number of people who had found enduring 
spiritual solace. 

Second best could mean only one thing— that the production of 
goods was the second highest in history. There had been a year in 
which production was higher and which hence was better. In fact in 
1954 the Gross National Product was $360*5 thousand million; the 
year before it had been $364*5. This measure of achievement was 
acceptable to all. It is a relief on occasion to find a conclusion that is 
above foction, indeed above debate. On the importance of produo* 
tion there is no difierence between Republicans and Democrats. 




right and left, white or coloured, CathoUc or Protestant. It is com- 
mon ground for the general secretary of the Communist Party, the 
Chairman of Americans for Democratic Action, the President of 
die United States Chamber of Commerce, and the President of 
the National Association of Manufacturers. 

We are, to be sure, regularly told that production is not every- 
thing. We set no small store by reminders that there is a spiritual side 
to hfe; those that remind are assured a respectful hearing. But it is 
significant that these are always reminders; they bring to mind what 
is usually forgotten. No one doubts that in the general coune of Hfe 
one must be sensible and practical. It is an index of the prestige of 
production in our national attitudes that it is identified with the 
sensible and the practical. And no greater compHment can be paid to 
the forthright intelligence of any businessman than to say that he 
understands production. Scientists are not without prestige in our 
day, but to be really useful we still assume that they should be imder 
the direction of a production man. ‘Any device or regulation which 
interferes, or can be conceived as interfering, with [the] supply of 
more and better things is resisted with unreasoning horror, as the 
rehgious resist blasphemy, or the warlike pacifism.’^ 

The importance of production transcends our boundaries. We are 
regularly told— in the conventional wisdom it is the most firequent 
justification of our civilization, even our existence— that the Ameri- 
can standard of Hving is ‘the marvel of the world’. To a very con- 
siderable extent it is. 


As Tawney observed, we are rarely conscious of the quality of the air 
we breathe. But in Los Angeles, where it is barely sufRdent for its 
fireight, we take it seriously. Similarly those who reside on a recently 
reclaimed desert see in the water in the canals die evidence of their 
unnatural triumph over nature. And the Chicagoan in Sarasota sees 
in his tanned belly the proof of his intelligence in escaping his dark 
and frozen habitat. But where sun and rain are abundant, though they 
are no less important, they are taken for granted. In the world of 
Ricardo goods were scarce. They were also closely related, if not to 

^ Geoffrey Gorer, The Americans (London, Cresiet Press, 1948), p. 121. 


the survival, at least to the elemental comforts of man. They fed him, 
covered him when he was out of doors, and kept him warm when he 
was within. It is not surprising that the production by which these 
goods were obtained was central to men’s thoughts. 

Now goods are abundant. More die in the United States of too 
much food than of too httle. Where the population was once thought 
to press on the food supply, now the food supply presses relentlessly 
on the population. No one can seriously suggest that the steel which 
comprises die extra four or five feet of purely decorative distance on 
our cars is of prime urgency. For many women and some men cloth- 
ing has ceased to be related to protection from exposure and has 
become, like plumage, almost exclusively erotic. Yet production 
remains central to our thoughts. There is no tendency to take it, like 
sun and water, for granted; on the contrary, it continues to measure 
the quality and progress of our civilization. 

Our preoccupation with production is, in fact, the culminating 
consequence of powerful historical and psychological forces— forces 
which only by an act of will we can hope to escape. Productivity, as 
we have seen, has enabled us to avoid or finesse die tensions anciendy 
associated with inequality and its inconvenient remedies. It has be- 
come central to our strivings to reduce insecurity. And as we shall 
observe in the next chapters its importance is buttressed by a higlily 
dubious but widely accepted psychology of want; by an equally 
dubious but equally accepted interpretation of national interest; and 
by powerful vested interest. So all-embracing, indeed, is our sense of 
die importance of production as a goal that the first reaction to any 
questioning of this attitude wiU be, * What else is there? ’ So large does 
production bulk in our thoughts that we can only suppose that a 
vacuum must remain if it should be relegated to a smaller role. 
Happily, as we shall see in the concluding chapters, there are other 
things. But first we must examine more closely our present pre- 
occupation with production. For nothing better suggests the extent 
to which it is founded on tradition and social myth than the highly 
stylized attitudes with which we approach it and, in particular, die 
traditional and highly irrational emphasis we accord to the different 
methods of expanding economic product. 





Production— the output of the economic system— can, in principle, 
be increased in five ^fierent ways. These are wordi listing formally 
and are as follows: 

(1) The productive resources that are available, in particular the 
labour and capital (including available raw materials), can be 
more fully employed. In other words, idleness can be eliminated. 

(2) Given the technical state of the arts, these resources can be more 
efficiently employed. Labour and capital can be used in the most 
advantageous combination, one with the other, and the two can 
be distributed to the greatest advantage, consumer tastes con- 
sidered, between the production of various things and the render- 
ing of various services. 

(3) The supply of labour can be increased. 

(4) The supply of capital, which also serves as a substitute for labour, 
can be increased. 

(5) The state of the arts can be improved by technological iimovation. 
As a result more output can be obtained firom a given supply of 
labour and capital and the capital will be of better quality. 

On purely a priori grounds there is no reason for supposing that 
any one of these methods of increasing production is more efi^tive 
than any other.^ A serious effort to increase ou^ut would emphasize 
all five. Yet it is the truly remarkable foct that we concern ourselves 
seriously with only one of these methods of increasing output and 
give, at the very most, only passing attention to another two or three. 

^ In die period between 1869-73 and 1944-53 net national output increased at an 
average annual rate of 3*5 per cent of which about half (1*7 per cent) can be 
attributed to the increase in capital and labour supply. The remainder can reason- 
ably be imputed to teduiological improvement in capital and the parallel improve- 
ment in the people who devise the better capital equipment and operate it hi 
recent times a growing share of the increase is attributable to such technological 
advance and a declining share to mete increases in capital and labour supply. 
C£ Moses Abramovitz, Resources and Output Trends in the United States Since 1870, 
and John W. Kendrick, Productivity Trends: Capital and Labor, Occasional papers 
5a and 53 of die National Bureau of Economic Research, New York, 1956. 


Thus even in the conventional wisdom no one questions the im- 
portance of technological advance for increasing the production (and 
also multiplying the products) from the available resources. These 
gains are regularly viewed with great and even extravagant pride. 
Improvements in technology do not come by accident. They are the 
result of investment in highly organized scientific and engineering 
knowledge and skills. Yet we do very little to increase the volume of 
this investment, except perhaps where some objective of military 
urgency is involved. Rather we accept whatever investment is 
curroidy being made and applaud the outcome. 

The investment almost certainly could be much greater and fsa 
more rational. Even on the most superficial view, the scientific and 
engineering resources by which modem technology is advanced are 
most unevenly distributed between industries. In industries where 
firms are few and comparatively large— oil, metallurgy, cars, chemi- 
cals, rubber, heavy engineering— the investmmt in technological 
advance is considerable. The research and developmental work on 
which this advance depends is well financed and comprehensive. But 
in many indtistiies where the firms are numerous and small— coal- 
mining, home construction, clothing manufiicture, the natural-fibre 
textile industry, the sovice industries— the investment in innovation 
is negligible. No firm is large enough to a£R)rd it on an appreciable 
scale; there is real question as to whether it is worth while for such 
firms.^ Unlike agriculture, where innovation is cxtmsively supported 
by the federal and state governments, there is little or no publicly 
financed research and development. Yet the absence of investment in 
innovation in these industries, much though we value its fruits in 
other industries in which it occun, excites not the slightest attention. 
We attach profound importance to the fret that some industries 
advance. We attach almost no importance to the fact that others 
do not. 

It is easy to overlook the absence of appreciable advance in an 
industry. Inventions that are not nude, like babies that are not bom, 
are rarely missed. In the absmee of new developments, old ones may 
seem very impressive for quite a long while. Until the combine 

* I have discussed this point in some detail in my American CapifaUsm: The 
Cancel of Cottnleruailu^ Power, pp. 84-94. 



appeared, the self-binder had been the mechanical marvel of the &rm 
machinery industry for forty years. But if we were serious about in- 
creased output, we would be much more searching in these matters. 
Certainly we would regard the absence of investment in innovation 
in an industry as intolerable. But in fact large numbers of industries 
make Htde or no such investment, have Utde or none made on dieir 
behalf, and we are quite untroubled. 


In everyday economic discourse nothing is more frequently taken as 
an index of economic growth than the volume of capital formation. 
This is the product of saving from ciurent consumption and com- 
panion investment. As with technological advance, we content our- 
selves with whatever volume of capital formation we are getting. An 
occasional scholar may observe that we are not investing enough— 
possibly that the proportion of current income invested by the 
Russians is much greater. We have routine preachments on the 
virtues of thrift. But none of this is assumed to call for any practical 
action. On the contrary, there is a more general conviction that the 
current volume of investment in the American economy is never less 
than adequate and is rarely less than remarkable. 

As with capital so with the labour force. Once princes and frudal 
lords who wished to increase the productive wealth of their domains 
imported craftsmen as a matter of course. So frr as there is a single 
current limitation on the rate of growth in the Amoican economy, 
it is the size of the labour force. (Substitution of capital for labour is 
ordinarily possible with slight e£Eect on cost over a considerable range 
of output, but some time is required.) The world contains a great 
many potential recruits for our labour force. But nothing would be 
viewed with more suspicion than this method of esipanding output. 
Even to suggest that e£>rts be made to e3q>and the labour force by 
increasing the domestic birth-rate would seem slightly artful. The 
resistance arises partly from the belief, not wholly justified, that an 
increase in population might increase total but not per capita produc- 
tion. No nice philosophical point has ever been so decisively resolved 
as this: that fiiose who are not conceived do not miss the pleasure of 


consuming the goods they do not get bom to enjoy. But whatever 
the e£^ of increasing population on standards of living, it is clear 
that we are not sufficiently interested in increased ou^ut, or suffi- 
ciently rational about the means of gettii^ it, to seek it by increasing 
the labour supply. 

Even the production that is lost during a depression— and as noted 
in the last chapter the loss from even a mild setback can be con- 
siderable— though it is the subject of a certain amount of erudite 
regret by economists is not a matter of any general concern. The 
menace of depressions is not the production that is sacrificed but the 
jobs and income that are lost— in short, the threat to economic 

On the other hand, we do take very seriously loss of production 
which is the result of the deUberate holding of labour or capital out of 
production or which is the result of any inefficiency in their com- 
bination and use. We deplore the malingering workman. We be- 
come deeply aroused by the feather-bedding union. A monopoly 
leads to a less than optimum employment of labour and capital in a 
particular industry and ffierefore a higher than necessary price for the 
product. The resources not employed in the monopolized industry 
are employed in larger quantity and to less advantage in other indus- 
tries, whidi means that their distribution is less than ideal. Consider- 
able enthusiasm can be aroused for measures that increase output by 
eliminating monopoly. Economists have never been loath to give 
their leadership to the efrbrt.^ There is equal antipafiiy to and similar 
popular concern about inefiicient use of resources restdting from 
tariffi and excessive investment in inherently costly industries; about 
subsidies to favoured but inefficient industries or firms; and about the 
forms of industrial oi^;anization which lead to heavy advertising or 
sales costs or similar seeming waste. Although, curiously, there is no 
especial concern about the industry that does no leseardi and makes 
little technological progress from one year to the next, nothing 

^ Although there have been competent expressions of doubt as to die losses. 
Cf in particular ‘Monopoly and Resource AUocation* by Arnold C. Harberger, 
American Eamomic Reuiew, Proceedings, voL XUV, no. 2 (May r954), and ‘The 
Social Cost of Corporate Monopoly Profits’ by Henry H. Vilhud, Political Science 
Quarterly, voL LXXU, no. 3 (Sqxtember 1937). 



inspires indignation like a firm which, having made an invention, 
holds it out of use. 

None of this is specifically to decry concern for monopoly, tariifi, 
subsidies, or organized and imrcpcntant idleness. Also, although pro- 
ductive efficiency is tlie central, it is not the sole issue where these 
matters are concerned. Rather, my purpose is to show how partial 
and indeed eccentric is our concern for increased production. Nor are 
its roots very difficult to uncover. A hundred years ago in mid- 
nineteenth-century Britain, an economist surveying the possibilities 
for increasing the production on his islands would have found one 
important and two or three much less important things to recom- 
mend. Most obviously and most importantly, he could urge that by 
attacking monopolies, lowering tariffi, and promoting competition 
and the free and luihampered movement of labour and capital the 
efficiency with which labour and capital were employed would be 
increased. Much less importantly, he could urge that people be 
thrifty and save so that the rate of capital formation might be in- 
creased. And, of course, he could always urge workers to be diUgent, 
and he could condemn anything that might involve restrictions on 
their effort or impairment of their incentives. 

Few of the modem possibilities for raising production were rele- 
vant. In a world that was still imder the shadow of Malthus he could 
hardly propose adding more people. There were presumed to be as 
many as the food supply could sustain. This was well before the age 
of the large industrial corporation. Only with the arrival of the latter 
were investment decisions removed from the hands of numerous 
independent entrepreneurs, responding individually to market incen- 
tives, and made subject to a measure of corporate administration. 
And tmtil this happened it was not really possible to think of the rate 
of investment and the consequent rate of growth as anything that 
might be within range of social interest and decision. 

The nineteenth-century scholar could scarcely have been occupied 
with the volume of research and development in an industry. This is 
a modem phenomenon and also related to the growth of modem 
corporate enterprise. In his day invention was a largely adventitious 
matter save as it might be encouraged by the patent office. ^The 
patent office, appropriately, was taken very seriously.) The loss of 


production during depressions was not an issue in a world which 
kcked good luiemployment and output statistics and in which 
depressions, in any case, were regarded as inevitable. 

The lesson will be evident. Our operative concern for increasing 
production is confined to the measures— for getting greater resource- 
use efficiency and promoting thrift and diligence— which were rele- 
vant a century ago. The newer dimensions along which there might 
be progress attract our attention scarcely at all. The shortcomings and 
opportunities here are undoubtedly great. But they are outside the 
formal and stylized concern of the conventional wisdom for the 
problem of production. 

There is an interesting proof of the point in the increase in produc- 
tion which, in the past, we have regularly acliicved during war or 
under die threat of war. Under the stress of circumstance the con- 
ventional wisdom is rejected. We set about expanding output along 
all the relevant dimensions. Serious efforts are made to expand the 
labour force. It becomes permissible to import toilers with swarthy 
skins who speak unintelligible languages. The drive for increased 
saving becomes serious. Where investment is inadequate more is 
made. There is no involuntary idleness. As in the case of alloy steels, 
synthetic rubber manufiteture, and ship construction in World War 
II, technologyis brought purposefully intoplay to permit of expanded 
output with available resources. It is at least amusing (though not too 
much store should be set by the point) that during both World Wars 
the enforcement of the anti-trust laws, the traditional design for 
ensuring greater resource-use efficiency, was suspended. Because of a 
rational concern for production war has brought an astonishing ex- 
pansion in output, and this despite the withdrawals firom the labour 
force for military purpose. 

Though we have been astonished we should not have been. Our 
peacetime concern for production, central though it is to our 
thoughts, is selective and traditionaL As a result, at any given time 
both our total output and its rate of increase are only a small part of 
what it m^t be, perhaps indeed only a minor fiction. Nor would 
the necessary measures to expand labour force, expand the rate of 
capital formation, and perhaps most important to bring technology 
to bear on presently backward industries require any very revolu- 

104 thb affluent society 

tionary diange in our economic and political system. It would only 
require that production have die priority in all public policy which 
it now has in the traditional areas of resource use and combination. 

There is another respect in which our concern for production is 
traditional and irrational. We are curiously unreasonable in the dis- 
tinctions we make between different kinds of goods and services. 
We view the production of some of the most frivolous goods with 
pride. We regard the production of some of the most significant and 
civilizing services with regret. 

Economists in calculating the total output of the economy— in 
arriving at the now familiar Gross National Product— add together 
the value of all goods and all services of whatever sort and by whom- 
soever produced. No distinction is made between public and pri- 
vately produced services. An increased supply of educational services 
has a standing in the total not different in kind from an increased out- 
put of television receivers. Nothing, however, could be more in 
conflict with popular attitudes, and indeed it is rather surprising that 
economists have not been reproached by the rather considerable 
number of individuals who, if diey fully understood the nature of the 
calculation, would regard the inclusion of government spending as 

In the general view it is privately produced production that is im- 
portant, and that nearly alone. This adds to national well-being. Its 
increase measures the increase in national wealth. Public services, by 
comparison, are an incubus. They are necessary, and they may be 
necessary in considerable volume. But they are a burden which must, 
in effect, be carried by the private production. If that burden is too 
great, private production will stagger and fidl. 

At best public services are a necessary evil; at worst they are a 
malign tmdency against which an alert commiuiity must exercise 
eternal vigilance. Even when they serve the most important ends, 
such services are sterile. ‘Government is powerless to create anything 
in the sense in which business produces wealth. . . 

1 Francis X. Sutton, Seymour £. Harris, Carl Kaysen, and James Tobin, The 
American Business Creed (Cambridge, Mass., Harvard Univerity Press, 1956}, p. 195. 


Such attitudes lead to some interesting contradictions. Cars have 
an importance greater than the roads on which diey are driven. We 
welcome expansion of telephone services as improving the general 
well-being but accept curtailment of postal services as signifying 
necessary economy. We set great store by die increase in private 
wealth but regret the added outlays for the police force by which it is 
protected. Vacuum cleaners to ensure dean houses are praiseworthy 
and essential in our standard of hving. Street cleaners to ensure clean 
streets are an unfortunate expense. Pardy as a result, our houses arc 
generally dean and om streets generally filthy. In the more sophisti- 
cated of the conventional wisdom, diis distinction between public 
and private services is mudi less sharp and, as I have observed, it does 
not figure in the calculation of Gross National Product. However, 
it never quite disappears. Even among economists and political philo- 
sophers, public services rarely lose their connotation of burden. 
Although they may be defended, their volume and quality are almost 
never a source of pride. 

There are a number of reasons for these attitudes, but again tradi- 
tion plays a dominant role. In the world into which economics was 
bom the four most urgent requirements of man were food, dothing 
and shelter, and an orderly environment in which the fint three 
might be provided. The first three lent themselves to private pro- 
duction for the market; given good order, this process lias ordinarily 
gone forward with tolerable effidency. But order which was the gift 
of government was nearly alvtrays supplied with notable unreliability. 
With rare exceptions it was also inordinately expensive. And the 
pretext of providing order not infrequently afforded the occasion for 
rapadous appropriation of the means of sustenance of the people. 

Not surprisingly, modem economic ideas incorporated a strong 
suspidon of government. The goal of nineteenth-century economic 
liberalism was a state which did provide order reliably and inexpen- 
sively and which did as little as possible else. Even Marx intended that 
the state should wither away. These attitudes have persisted in the 
conventional wisdom. And again events have dealt them a series of 
merciless blows. Once a sodety has provided itself with food, doth- 
ing, and shdtor, all of which so fortuitously lend themsdves to pri- 
vate production, purchase, and sale, its members begin to d^e 



Other things. And a remarkable number of these things do not lend 
themselves to such production, purchase, and sale. They must be 
provided for everyone if they are to be provided for anyone, and 
they must be paid for collectively or they cannot be had at all. Such 
is the case with streets and police and the general advantages of mass 
htetacy and sanitation, the control of epidemics, and the common 
defence. There is a bare possibility diat the services which must be 
rendered collectively, although ^ey enter the general scheme of 
wants after the immediate physical necessities, increase in urgency 
more than proportionately with increasing wealth. This is more likely 
if increasing wealth is matched by increasii^ population and increas- 
ing density of population. None the less these services, although they 
reflect increasingly urgent desires, remain imder the obloquy of the 
unrehability, incompetence, cost, and pretentious interference of 
princes. Alcohol, comic books and mouth-wash all bask under the 
superior reputation of the market. Schools, judges, and municipal 
swimming-pools He imder the evil reputation of bad kings. 

Moreover, bad kings in a poorer world showed themselves to be 
quite capable, in their rapacity, of destroying or damping the pro- 
duction of private goods by destroying the people and the capital 
that produced them. Economies are no longer so vulnerable. Govern- 
ments are not so imdiscriminating. In western countries in modem 
times economic growth and expanding pubHc activity have, with 
rare exceptions, gone together. Each has served the o^er as indeed 
they must. Yet the conventional wisdom is far &om surrendering on 
the point. Any growth in pubHc services is a manifestation of an 
intrinsically evil trend. If the vigour of the race is not in danger, 
Hberty is. And this may be threatened even by the activities of the 
local school board. The structure of the economy may also be at 
stake. In one branch of the conventional wisdom the American eco- 
nomy is never £u removed from socialism and the movement 
toward sodaHsm may be measured by the rise in pubHc spending. 
Thus even the most neutral of pubHc services, for one part of the 
population, frll under the considerable handicap of being identified 
with social revolution. 

RnaUy— also a closely related point— the payment for pubHcly 
produced services has long been linked to the problem of inequaHty. 


By having die rich pay more, the services were provided and at the 
same time the goal of greater equahty was advanced. This com- 
munity of objectives has never appealed to those being equalized. 
Not unnaturally, some part of their opposition has been directed to 
the pubUc services themselves. By attacking these, they could attack 
the levelling tendencies of taxation. This has helped to keep alive the 
notion that the public services for which they pay are inherendy 
inferior to privately produced goods. 

While pubUc services have been subject to these negative attitudes, 
private goods have had no such attention. On die contrary, their 
virtues have been extolled by the massed drums of modem adver- 
tising. They have been pictured as the ultimate wealth of the 
commtuiity. Clearly the competition between public and private ser- 
vices, apart from any question of the sads&ctions they render, is an 
unequal one. The social consequences of this discrimination— diis 
tendency to accord a superior prestige to private goods and an 
inferior role to public production— are considerable and even grave. 


By way of summary, then, while production has come to have a goal 
of pre-eminent importance in our life, it is not a goal which we pur- 
sue either vigorously or even very thoughtfully. We take production 
as the measure of our achievement, but we do not strive very deliber- 
ately to achieve. Our efforts to increase production are styled. We 
stress the evils of idleness and bad resource allocation which were 
relevant to efforts to increase output a century ago. We do Uttle or 
nothing in peacetime to increase the rate of capital formation or the 
rate of technological progress in backward industries despite the clear 
indication that these are the dimensions along vdiich lai^e increases 
in output are to be expected. We rarely deplore the production we 
lose in depression. We are protected ffom this loss £ax more by the 
threat of depression to economic security. Last of all, on ancient and 
traditional grounds, we relegate one important class of production to 
a second-class citizenship. 

The predictable reaction of many readers will be that we should by 
all means address ourselves to the measures for increasing output that 



we now ignore. However, a closer look is called for. We need to 
understand the reasons for our passivity in this matter. In the past, 
under conditions of emergency, we have addressed ourselves seriously 
to the meastu%s by which output is seriously increased. Perhaps we 
£ul to do so in present circumstances less because of ignorance or 
inertia than because the additional production is not of sufficient 
urgency to justify the effort. Our preoccupation with production, in 
odier words, may be a preoccupation with a problem of rather low 
urgency. We arc not sufficiendy concerned about it to have recoune 
to the measures by which production could be effidendy increased. 
We are content with what we get, which comes dose to saying that 
we are deeply concerned with production only so far as the problem 
solves itself. We set great store by doing what, in a manner of speak- 
ing, comes naturally. 

None of this would be possible if the goods we produced were of 
great and urgent importance. Then wc would be searching vigor- 
ously for ways of increasing the supply instead, as at present, of 
regarding with approval the increases we obtain. All diis becomes 
inteUigible, and in degree even obvious, when we contemplate the 
elaborate myth with wliich we surround the demand for goods. This 
has enabled us to become persuaded of the dire importance of the 
goods we have without our being in the sUghtest degree concerned 
about those we do not have. For we have wants at the margin only 
so £ir as they arc synthesized. We do not manufacture wants ffir 
goods we do not produce. 



The Imperatives of Consumer Demand 

In an economy, such as that of the United States of America, where 
leisure is barely moral, the problem of creating sufficient wants ... to 
absorb productive capacity may become chronic in the not too distant 
future. In such a situation the economist begins to lead a furtive existence. 


Both tlic ancient preoccupation with production and the pervasive 
modem search for security have culminated in our time in a concern 
for production. Increased real income provides us with an admirable 
detour around the rancour anciently associated with efforts to redis- 
tribute wealth. A high level of production has become the keystone 
of effective economic security. There remains, however, the task of 
justifying the resulting flow of goods. Production cannot be an 
incidental to the mitigation of inequality or die provision of jobs. It 
must have a raison d'Stre of its own. At this point economists and 
economic theory have entered the game. So, radier more recendy, 
have those who profess to be the pliilosophcrs on problems of defence 
and national security. The result has been an elaborate and ingenious 
defence of the importance of production as such. It is a defence which 
makes the urgency of production largely independent of the volume 
of production. In this way economic theory has managed to transfer 
the sense of urgency in meeting consumer need that once was felt in 
a world where more production meant more food for the hungry, 
more clothing for die cold, and more houses for the homeless to 
a world where increased output satisfies the cravinj^ fpi: ni9re ele- 
gant cars, more exotic food, more erotic clothing, mote ekboratpi, 
^ 'The Economist as a Modem Missionary*, The Economic Jourtf/i^ Mafcjh .Z95d. 




entertainmoit— indeed for the entire modem range of sensuous, 
edifying, and lethal desires. 

Although the economic theory which defends these desires and 
hence the production that supplies them has an impeccable (and to 
an astonishing degree even unchallenged) position in the conven- 
tional wisdom, it is illogical and meretricious and in degree even 


The rationalization begins with the peculiar urgency of production 
not to society but to economic science. There will be occasion later 
for considering the vested interest in production, but it may be noted 
here that the interest of the economist is unique. The importance of 
production is central to his scheme of economic calculation. All exist- 
ing pedagogy and nearly all research depend on it. Any action which 
increases production from given resources is good and implicitly 
important; anything which inhibits or reduces output is pro tanto 
wrong. In the choice between two taxes there is a nearly overriding 
case for the one tliat least damages efficiency, meaning the output 
from a given stock of labour and capital. If a company seems to be 
restricting production to enhance returns, or for any other reason, it 
can safely be condemned as anti- 40 cial. This is at least equally so with 
a trade imion. The test of effect on productive efficiency is all but 

To assess the effect of a given action or measure, say a new union 
rule, on production is not always easy. There may be a complicated 
chain of cause and effect on which opinions will difier. The efrect on 
the short run may be different from that on the long. And where it is 
necessary to assess the efrect on a variety of products, or on the total 
ouq>ut of the economy, there are numerous difficulties. The latter 
must be valued, and die prices at which individual items are valued 
will reflect the existing income distribution— the prices of mink pelts 
reflect the demand of an opulent minority— or, in some cases, die 
more or less arbitrary decision of the firms that administer the prices. 
Hence to trace and compare the effect of dififerent policies on the 
ou^ut of the economy can be endlessly intricate. But all this pro- 
vides much of the interest of economics as wdl as a good deal of its 


employment. And underlying all is the bedrock agreement on the 
goal and on the importance of that goaL Anything that increases the 
product &om givoi resources increases wel&te. It is important that it 
be done. Here is the anchor. To cast doubt on the importance of pro- 
duction is thus to bring into question the foundation of the entire 
edifice. Action must dien be tested by new criteria— criteria which 
are necessarily difficult and subjective. Nothing could be less wel- 
come. At least in social disciplines, obsolescence and irrelevance are a 
small price to pay for the privilege of remaining comfortably, even if 
archaically, with the familiar, the settled, and the safe. 

And the profession of economics is not lacking in the instinct of 
self-preservation. The mother bear sees in the threat to her cubs the 
ultimate threat to the survival of her kind. She reacts with angry 
venom. Nothing is more likely to produce a similar reaction from 
defenders of the conventional economic wisdom than an attack on 
the edifice which now rationalizes the importance of production and 
the urgency of consiuner need. 

The parallel with maternal instinct is important, for the defence of 
the present value system as it relates to production is largely intuitive. 
Few economists in recent years can have escaped some uneasiness 
over the kinds of goods which their value system is insisting diey 
must maximize. They have wondered about the urgency of the 
longer and lower can. They have been uneasy about die lengths to 
which it has been necessary to go widi advertising and salesmanship 
to synthesize the desire for such goods. That uneasiness has reflected 
the crucial weakness of the literature at this point. 

Some, moreover, have also noticed the changed position of the 
economist in the community. Twraty yean 9^ he was in touch with 
the problems of depression and imemployment. Even though there 
was less than genoral certainty that he had the answen, he was a 
figure of interest and controveny. Now for many yean he has been 
in an intellectual backwater. The dentist who seeks the fluoridation 
of the city water supply is a more controvenial figure than the eco- 
nomist who tells of an eiqianding economy. Once students were 
attracted by the seeming urgency of economic problems and by a 
sense of their mission to solve them. Now the best come to econo- 
mics for the opportunity it provides to exercise arcane mathematical 



skills. Could this mean that society itself is losing its sense of the 
urgency of the economic problem? Does it mean that there is now a 
subjective realization that increased product is being used to serve 
rather unimportant ends? Even the vigour and scorn of the denial 
may reflect uncertainty. 

As with the bear and her cubs we must expect the reaction to be 
increasingly sharp as the danger becomes more threatening. In part it 
will take die form of a purely assertive posture. ‘There is still an 
economic problem’; ‘ Wc still have poverty’; ‘It is human nature to 
want more’; ‘Without increasing production there will be stag- 
nation’; ‘We must show the Russians’. But the ultimate refuge will 
remain in the theory of consumer demand. This is a formidable 
structure; it- has already demonstrated its eflfcctivcness in defending 
the urgency of production. In a world where aflluence is rendering 
the old ideas obsolete, it will continue to be the bastion against the 
misery of new ones. 


Hie theory of consumer demand, as it is now widely accepted, is 
based on two broad propositions, neither of them quite eicplicit but 
both extremely important for the present value system of econo- 
mists. The first is that the urgency of wants does not diminish appre- 
ciably as more of them are satisfied or, to put the matter more 
precisely, to the extent that this happens it is not demonstrable and 
not a matter of any interest to economists or for economic policy. 
When man has satisfied his physical needs, then psychologically 
grounded desires take over. These can never be satisfied or, in any 
case, no progress can be proved. The concqpt of satiation has very 
little standing in economics. It is neither useful nor scientific to 
speculate on the comparative cravings of the stomach and the mind. 

The second proposition is that wants originate in the penonality 
of the consumer or, in any case, that they are given data for the 
economist. The latter’s task is merely to seek their satisfiiction. He has 
no need to inquire how these wants are formed. His function is 
suflidently fulfilled by maximizing the goods that supply the wants. 

The examination of these two conclusions must now be pressed. 
The explanation of consiuner behaviour has its ancestry in a much 


older problem, indeed the oldest problem of economics, that of price 
determination,^ Nothing originally proved more troublesome in the 
explanation of prices, i.e. exchange values, than the indigestible fact 
that some of the most useful things had the least value in exchange 
and some of the least useful had the most. As Adam Smith observed: 
‘Nothing is more useful than water; but it will purchase scarce any- 
thing; scarce anything can be had in exchange for it. A diamond, on 
the contrary, has scarce any value in use: but a very great quantity of 
other goods may frequently be had in exchange for it.’* 

In explaining value. Smith thought it well to {distinguish between 
‘value in exchange’ and ‘value in use’ and sought thus to reconcile 
the paradox of high utility and low exchangeability. This distinction 
begged questions rather than solved them and for another hundred 
years economists sought for a satisfactory formulation. Finally, to- 
ward the end of die last century— though it is now recognized that 
their work had beai extensively anticipated— the three economists of 
marginal utility (Karl Monger, an Austrian; William Stanley Jevons, 
an Englishman; and John Bates Clark, an American) produced more 
or less simultaneously the explanation which in broad substance still 
serves. The urgency of desire is a function of the quantity of goods 
which the individual has available to satisfy diat desire. The larger the 
stock the less the satisfactions from an increment. And the less, also, 
the willingness to pay. Since diamonds for most people are in com- 
paratively meagre supply, the satisfaction from an additional one is 
great, and the potential willingness to pay is likewise high. The case 
of water is just the reverse. It also follows that where the supply of a 
good can be readily increased at low cost, its value in exchat^e will 
reflect that ease of reproduction and the low urgoicy of the marginal 
desires it thus comes to satisfy. This will be so no matter how difficult 
it may be (as with water) to dispense entirely with the item in 

The doctrine of diminishing marginal utility, as it was enshrined 
in the economics textbooks, seemed to put economic ideas squarely 

* Ihe provenance of the theory of consumer behaviour is sketched in Mr. 
I. D. M. little’s interesting article ‘A Reformulation of Consumer Behaviour’, 

Economic Peters, New Series, vol. I, no. i (January 1949), p. 99. 

* Wealth of Nations. Smith did not foresee <he industrial diamond. 



on the side of the diminishing importance of production under con- 
ditions of increasing affluence. With increasing per capita real income, 
men are able to satisfy additional wants. These are of a lower order of 
urgency. This being so, the production that provides the goods that 
satisfy these less urgent wants must also be of smaller (and declining) 
importance. In Ricardo’s England the supply of bread for many was 
meagre. The satisfaction resulting from an increment in the bread 
supply— from a higher money income, bread prices being the same, 
or die same money income, bread prices being lower— was great. 
Hunger was lessened; Hfe itself might be extended. Certainly any 
measure to increase die bread supply merited the deep and serious 
interest of the public-spirited citizen. 

In the contemporary United States the supply of bread is plentiful 
and the supply of bread grains even redundant. The yield of satis- 
factions &om a marginal increment in the wheat supply is small. To 
a Secretary of Agriculture it is indubitably negative. Measures to 
increase the wheat supply are not, dierefore, a socially urgent pre- 
occupation of pubhely concerned citizens. These arc more likely to 
be foimd spending their time devising schemes for the effective con- 
trol of wheat production. And having extended their bread con- 
sumption to the point where its marginal utility is very low, people 
have gone on to spend their income on other things. Since these 
other goods entered their consumption pattern after bread, there is 
a presumption that they arc not very urgent either- that their con- 
sumption has been carried, as with wheat, to the point where mar- 
ginal utility is small or even negligible. So it must be assumed that the 
importance of marginal increments of all production is low and 
declining. The efi^t of increasing affluence is to minimize the impor- 
tance of economic goals. Production and productivity become less 
and less important. 

The concept of diminishing marginal utility was, and remains, one 
of the indispensable ideas of economics. Since it conceded so much to 
the notion of diminishing mgency of wants, and hence of produc- 
tion, it was remarkable indeed that the situation was retrieved. This 
was done— and brilhandy. The diminishing urgency of Avants was 
not admitted. In part this was accomplished in the name of refined 
scientific mediod which, as so often at the higher levels of sophistica- 


don, proved a formidable bulwark of the convendonal wisdom. 
Obvious but inconvenient evidence was rejected on the grounds that 
it could not be scientifically assimilated. But even beyond this, it has 
been necessary at dmes simply to close one’s eyes to phenomena 
which could not be reconciled with convenience. 


The first step, as noted earlier, was to divorce economics from any 
judgment on the goods with wliich it was concerned. Any nodon of 
necessary versus unnecessary or important as against unimportant 
goods was rigorously excluded from the subject. Alfred Marshall, 
who on this as on so many other things, laid down the rules to which 
economists have since adhered, noted that ‘the economist studies 
mental states rather tlirough their manifestadons than in themselves; 
and if he finds they a£ford evenly balanced incendves to acdon, he 
treats them prima facie as for his purposes equal’.^ He almost im- 
mediately added that this simplificadon, which indeed has rendered 
profound scientific service to economics, was only a ‘stardng-point’. 
But economists ever since have been content to stay with his starting- 
point and to make it a mark of scholarly restraint and scientific virtue 
to do so. Nothing is so thorouglily drilled into the minds of the 
young as the need for this restraint. Nothing in economics so quickly 
marks an individual as incompetently trained as a disposidon to 
remark on the legidmacy of the desire for more food and the frivolity 
of the desire for a more elaborate car. 

Next, economics took general cognizance of the fact diat an 
almost infinite variety of goods await the consumer’s attendon. At 
die more elementary (and also the more subjeedve) levels of econo- 
mic analysis it is assumed that, while die marginal utility of the 
individual good declines in accordance with the indubitable law, the 
utility or sadsfiicdon from new and difierent kinds of goods does not 
diminisli appreciably. So long as the consumer adds new products— 
seeks variety rather than quandty— he may, like a museum, accumu- 
late without diminishing the urgency of his wants. Since even in Los 
Angeles the average consumer owns only a fiacdon of the difierent 
^ Prindpkso/Econmks, p. KS. 



kinds of goods he might conceivably possess, there is all but unlimited 
opportunity for adding such products. The rewards to the possessors 
are more or less proportional to the supply. The production that 
supphes these goods and services, since it renders undiminished 
utihty, remains of undiminished importance. 

This position ignores die obvious fact that some things are acquired 
before others and that, presumably, the more important things come 
first. This, as observed previously, implies a declining urgency of 
need. However, in die slighdy more sopliisticated theory this con- 
clusion is rejected. The rejection centres on the denial that anything 
very useful can be said of the comparative states of mind and satis- 
faction of the consumer at difierent periods of time. Few students of 
economics, even in the elementary course, now escape without a 
warning against the error of intertemporal comparisons of the utility 
from given acts of consumption. Yesterday the man with a minimal 
but increasing real income was reaping the satisfretions which came 
from a decent diet and a roof that no longer leaked water on his face. 
Today, after a large increase in his income, he has extended his con- 
sumption to include suede shoes and a weekly visit to the races. But 
to say that his satisfactions from these latter amenities and recreations 
are less than from the additional calories and the freedom from rain 
is wholly improper. Things have changed; he is a different man; 
there is no real standard for comparison. That, as of a given time, an 
individual will derive lesser satisfretions from the marginal incre- 
ments to a given stock of goods, and accordingly caimot he induced 
to pay as much for them, is conceded. But this tells us nothing of the 
satisfretions from such additional goods, and more particularly from 
different goods, when they are acquired at a later time. The con- 
clusion follows. One cannot be sure that the satisfaction from these 
temporally later increases in the individual’s stock of goods dimi- 
nishes. Hence one cannot suggest that the production which supplies 
it is of diminishing urgency. 

A moment’s reflection on what has been accomplished will be 
worth while. The notion of diminishing utility still serves its in- 
dispensable purpose of relating urgency of desire and consequent 
willingness to pay to quantity. At any given time the more the indi- 
vidual might have, the less would be the satisfretion he would derive 


from additions to his stock and the less he would be willing to pay. 
The reactions of the community will be the aggregate of the reactions 
of the individuals it comprises. Hence the greater the supply the less 
the willingness to pay for marginal increments and hence the demand 
curve familiar to all who have made even the most modest venture 
into economic theory. But, at the same time, the question of the 
diminishing urgency of consumption is elided. For, while the ques- 
tion of willingness to pay for additional quantities is based on a hypo- 
thesis as to behaviour in face of these quantities at a given point of 
time, an increase in stock of consumer’s goods, as the result of an 
increase in real income, can occur only over time. On the yield of 
satisfactions from this the economist has nothing to say. In the name 
of good scientific method he is prevented from saying anything.^ 
There is room, however, for the broad assumption— given die large 

^ In the yet more technical analysis of consumer demand, attention has been 
further diverted from the diminishing urgency of product by the shift from 
cardinal to ordinal utihty as an instrument of analysis. Ordinal analysis treats the 
consumer’s desires strictly in terms of the preferences of one good as against the 
other. This does not mean either that the notion of diminishing marginal utility of 
a good or die diminishing urgency of additional products disappears. In the 
indifference map or surface diminishing marginal utility is what makes die con- 
sumer willing, with an increasing stock, to surrender more and more of one 
product to have a given quantity of another. Recreation will not enter the con- 
sumer’s preference system except in combination with some minimum quantity 
of food. Food can be present without recreation. 

However, these considerations are not obtrusive in the analysis or its pedagogy. 
Ihe much more evident fact is that food, gasoline, and pinball all exchange for one 
another at given rates and thus are equated one with the other. The point most 
stressed in the pedagogy is that the consumer will always find his highest satisfaction 
hn the highest indifference curve that his income allows him to reach. The effect of 
oigher income or of a larger product at lower prices is to put the consumer on a 
higher curve. This goal is impheit in the analysis. Thus a line of thought which once 
might seem to throw doubt on the importance of marginal increments to the stock 
of goods ends by afSrming it. In practice the analytical apparatus excludes from 
consideration the possibility that the movement to higher and higher indifference 
curves is of declining urgency. 

The unprofessiond reader who wishes to acquaint himself with the essentials of 
this analysis will find a competent and ludd summary in Paul A. Samuelson’s 
chapter appendix 'Geometrical Analysis of Consumer Equilibrium’, Economics 
(3rd ed.. New York, McGraw-Hill, I955)» PP* 43^8. 



and ever-growing variety of goods awaiting the consumer’s attention 
—that wants have a sustained urgency. In any case, it can safely be 
concluded that more goods will satisfy more wants than fewer goods. 
And the assumption that goods are an important and even an mgent 
thing to provide stalks unchallenged behind, for have not goods 
always been important for relieving the privation of mankind? It will 
be evident that economics has brilliantly retrieved the dangers to itself 
and to its goals that were inherent in diminishing marginal utility. 

There has been dissent. Keynes observed that the needs of human 
beings ‘fall into two classes— those needs which are absolute in the 
sense that we feel them whatever the situation of our fellow human 
beings may be, and those which are relative only in that their satis- 
faction lifts us above, makes us feel superior to, our fellows’. While 
conceding that the second class of wants might be insatiable, he 
argued tliat the first were capable of being satisfied and went on to 
conclude that ‘assuming no important wars and no important in- 
crease in population the economic problem may be solved, or at least 
within sight of solution, within a hundred years. This means the 
economic problem is not— if we look into the future — permanent 
problem of the human race*^ However, on this conclusion Keynes made 
no headway. In contending with the conventional wisdom he, no 
less than others, needed the support of circumstance. And in contrast 
with his remedy for depressions this he did not yet have. 

^J. M. Keynes, Essays in Persuasion, ‘Economic Possibilities for Our Grand- 
children*, pp. 365-^. The italics arc in the original. Notice that Keynes, as always 
litde bound by the conventional rules, did not hesitate to commit the unpardonable 
sin of distinguishing between categories of desire. 



The Dependence Effect 

The notion that wants do not become less urgent the more amply the 
individual is supplied is broadly repugnant to common sense. It is 
something to be beUeved only by those who wish to behevc. Yet the 
conventional wisdom must be tackled on its own terrain. Inter- 
temporal comparisons of an individual’s state of mind do rest on 
doubtful grounds. Who can say for sure that the deprivation which 
afflicts him with hunger is more painful than the deprivation wliich 
afflicts him with envy of his neighbour’s new car? In the time that 
has passed since he was poor his soul may have become subject to a 
new and deeper searing. And where a society is concerned, compari- 
sons between marginal satisfactions when it is poor and those when it 
is affluent will involve not only the same individual at different times 
but different individuals at diff^ent times. The scholar who wishes 
to bcUeve that with increasing affluence there is no reduction in the 
urgency of desires and goods is not without points for debate. How- 
ever plausible the case against him, it cannot be proved. In the 
defence of the conventional wisdom this amounts almost to invul- 

However, there is a flaw in the case. If the individual’s wants are to 
be urgent they must be original with himself. They cannot be urgent 
if they must be contiived for him. And above all they must not be 
contrived by the process of production by which they are satisfied. 
For this means tlut the whole case for the urgency of production, 
based on the urgency of wants, &lls to the ground. One cannot 
defrad production as satisfying wants if that production creates the 




Were it so that a man on arising each morning was assailed by 
demons which instilled in him a passion sometimes for silk shirts, 
sometimes for kitchenware, sometimes for chamber-pots, and some- 
times for orange squash, there would be every reason to applaud the 
effort to find die goods, however odd, that quenched this flame. But 
should it be that his passion was the result of his first having culti- 
vated the demons, and sliould it also be diat his effort to allay it 
stirred the demons to ever greater and greater effort, there would be 
question as to how rational was his solution. Unless restrained by 
conventional attitudes, he might wonder if the solution lay with 
more goods or fewer demons. 

So it is that if production creates the wants it seeks to satisfy, or if 
die wants emerge pari passu with the production, then die urgency 
of the wants can no longer be used to defend the urgency of the pro- 
duction. Production only fills a void that it has itself created. 


The point is so central that it must be pressed. Consumer wants can 
have bizarre, frivolous, or even immoral origins, and an admirable 
case can still be made for a society that seeks to satisfy them. But the 
case cannot stand if it is the process of satisfying wants that creates the 
wants. For then the individual who urges the importance of produc- 
tion to satisfy these wants is precisely in the position of the onlooker 
who applauds the efforts of the squirrel to keep abreast of the wheel 
that is propelled by his own efforts. 

That wants are, in fiict, the finit of production will now be denied 
by few serious scholars. And a considerable number of economists, 
though not always in full knowledge of the implications, have con- 
ceded the point. In the observation cited at the end of the preceding 
chapter Keynes noted that needs of ‘the second class’, i.e. those that 
are the restdt of ef&rts to keep abreast or ahead of one’s fellow being 
‘may indeed be insatiable; for the higher the general level the higher 
still are they’.^ And emulation has always played a considerable role 
in the views of other economists of want creation. One man’s con- 
sumption becomes his neighbour’s wish. This already means that the 

* Op. cit. 



process by which wants are satisfied is also the process by which 
wants are created. The more wants that are satisfied the more new 
ones are bom. 

However, the argument has been carried farther. A leading modem 
theorist of consumer behaviour. Professor Duesenberry, has stated 
exphdtly that ‘ours is a society in which one of the principal social 
goals is a higher standard of living. . . . [This] has great significance 
for the theory of consumption . . . the desire to get superior goods 
takes on a Ufe of its own. It provides a drive to higher expenditure 
which may even be stronger than that arising out of the needs which 
are supposed to be satisfied by that e3q)enditure.’^ The implications 
of this view are impressive. The notion of independently established 
need now sinks into the badkground. Because the society sets great 
store by ability to produce a high Uving standard, it evaluates people 
by the products they possess. The urge to consume is fathered by the 
value system which emphasizes the ability of the society to produce. 
The more tliat is produced die more that must be owned in order to 
maintain the appropriate prestige. The latter is an important point, 
for, without going as fiu: as Duesenberry in reducing goods to the role 
of symbols of prestige in die affluent society, it is plain that his argu- 
ment fully implies that the production of goods creates the wants 
that the goods are presumed to satisfy. 


The even more direct link between production and wants is pro- 
vided by the institutions of modon adverdsii^ and salesmanship. 
These cannot be reconciled with die notion of independendy deter- 
mined desires, for their central function is to create desires— to bring 
into being wants that previously did not exist.* This is accomplished 

^James S. Duesenberry, Income, Saving and the Theory of Consumer Behaviour 
(Cambridge, Mass., Harvard University Press, 1949), p. 28. 

* Adverdsii^ is not a simple phenomenon. It is also important in competitive 
strategy and want creation is, ordinarily, a complementary result of efforts to shift 
the demand curve of the individual finn at the eiq)ense of others or (less impor- 
tantly, I think) to diange its shape by increatii^ die degree of product difi&ren- 
tiation. Some of the £diute of economists to identify advertising with vnnt 
creation may be attributed to the undue attention that its use in purely competitive 



by the producer of the goods or at his behest. A broad empirical re- 
lationship exists between what is spent on production of consumcn’ 
goods and whatis spent in synthesizing the desires for that production. 
A new consumer product must be introduced witli a suitable adver- 
tising campaign to arouse an interest in it. The path for an expansion of 
output must be pavedby a suitable expansion in the advertising budget. 
Outlays for the manufacturing of a product arc not more importantin 
the strategy of modem business enterprise dian outlays for the manu- 
facturing of demandfor die product. None ofdiis is novel. Allwould 
be regarded as elementary by the most retarded student in the nation’s 
most primitive school ofbusiness administration. The cost of this want 
formation is formidable. In 1956 total advertising expenditure— 
though, as noted, not all of it may be assigned to the synthesis of wants 
—amounted to about ten thousand million dollars. For some years it 
had been increasing at a rate in excess of a diousand million dollars a 
year. Obviously, such outlays must be integrated with the theory of 
consumer demand. They are too big to be ignored. 

But such integration means recognizing that wants arc dependent 
on production. It accords to the producer the function both of 
making the goods and of making the desires for them. It recognizes 
that production, not only passively through emulation, but actively 
through advertising and related activities, creates the wants it seeks 
to satisfy. 

The businessman and the lay reader will be puzzled over die 
emphasis which I give to a seemingly obvious point. The point is 
indeed obvious. But it is one which, to a singular degree, economists 
have resisted. They have sensed, as the layman does not, the damage 
to established ideas which lurks in these relationships. As a result, 
incredibly, they have closed their eyes (and ears) to &e most obtru- 
sive of all economic phoiomena, namely modem want creation. 

This is not to say that the evidence affirming the dependence of 
wants on advertising has been entirely ignored. It is one reason why 
advertising has so long been regarded with such imeasiness by econo- 
mists. Here is somediing which cannot be accommodated easily to 

strategy has attracted. It should be noted, however, that the competitive manipu- 
lation of consumer desire is only possible, at least on any appreciable scale, when 
such need is not strongly &lt 



existing theory. More pervious scholars have speculated on the 
urgency of desires which arc so obviously the fruit of such expen- 
sively contrived campaigns for popular attention. Is a new breakfast 
cereal or detergent so much wanted if so much must be spent to 
compel in the consumer die sense of want? But there has been little 
tendency to go on to examine die implications of this for the theory 
of consumer demand and even less for the importance of production 
and productive efficiency. These have remained sacrosanct. More 
often the uneasiness has been manifested in a general disapproval of 
advertising and advertising men, leading to die occasional suggestion 
that diey shouldn’t exist. Such suggestions have usually been ill 

And so die notion of independently determined wants still sur- 
vives. Ill the face of aU the forces of modem salcsniansliip it still rules, 
almost undefiled, in the textbooks. And it still remains the econo- 
mist’s mission— and on few matters is the pedagogy so firm— to seek 
unqucstioningly the means for filling these wants. This being so, 
production remains of prime urgency. We have here, perhaps, the 
ultimate triumph of the conventional wisdom in its resistance to die 
evidence of the eyes. To equal it one must imagine a humanitarian 
who was long ago persuaded of die grievous shortage of hospital 
facilities in the town. He continues to importune die passers-by for 
money for more beds and refuses to notice that the town doctor is 
deftly knocking over pedestrians with his car to keep up the occu- 

And in unravelling the complex we should always be careful not 
to overlook the obvious. The fact that wants can be syndiesized by 
advertising, catalysed by salesmanship, and shaped by the discreet 
manipulations of the persuaders shows that they are not very urgent. 
A man who is hungry need never be told of his need for food. If he 
is inspired by his appetite, he is immune to the influence of Messrs. 
Batten, Barton, Durstine and Osborn. The latter are effective only 
with those who are so far removed from physical want that they do 
not already know what they want. In this state alone men are open 
to persuasion. 




The general conclusion of these pages is of such importance for this 
essay that it had perhaps best be put with some formaUty. As a 
society becomes increasingly affluent, wants are increasingly created 
by the process by wliich they arc satisfied. This may operate passively. 
Increases in consumption, die counterpart of increases in production, 
act by suggestion or emulation to create wants. Or producers may 
proceed actively to create wants through advertising and salesman- 
ship. Wants thus come to depend on output. In technical tenns it can 
no longer be assumed that welfare is greater at an all-round higher 
level of production than at a lower one. It may be die same. The 
higher level of production has, merely, a higher level of want 
creation necessitating a higher level of want satis&ction. There will 
be firequent occasion to refer to the way wants depend on die process 
by which they are satisfied. It will be convenient to call it the 
Dependence Efflct. 

We may now contemplate briefly the conclusions to which this 
analysis has brought us. 

Plainly the theory of consumer demand is a peculiarly treacherous 
fiiend of die present goals of economics. At first glance it seems to 
defend the continuing urgency of production and our preoccupation 
with it as a goal. The economist does not enter into the dubious 
moral arguments about the importance or virtue of the wants to be 
satisfied. He doesn’t pretend to compare mental states of the same or 
different people at different times and to suggest that one is less 
urgent than another. The desire is there. That for him is sufficient. 
He sets about in a workmanlike way to satisfy desire, and accordingly 
he sets the proper store by the production that does. Like woman’s 
his work is never done. 

But this rationalization, handsomely though it seems to serve, 
turns destructively on those who advance it once it is conceded that 
wants are themselves both passively and dehberately the fimits of the 
process by which they are satisfied Then the production of goods 
satisfies the wants that the consumption of these goods creates or that 
the producen of goods synthesize. Production induces more wants and 



the need for more production. So far, in a major tour de force, the 
implications have been ignored. But this obviously is a perilous solu- 
tion. It cannot long survive discussion. 

Among the many models of the good society no one has urged the 
squirrel wheel. Moreover, as we shall see presently, the wheel is not 
one that revolves with perfect smoodiness. Aside from its dubious 
cultural charm, there are serious structural weaknesses which may 
one day embarrass us. For the moment, however, it is sufficient to 
reflect on the diflicult terrain which we arc traversing. In Chapter VIII 
we saw how deeply we were committed to production for reasons of 
economic security. Not the goods but the employment provided by 
their production was the thing by which we set ultimate store. Now 
we find our concern for goods further undermined. It does not arise 
in spontaneous consumer need. Rather, the dependence effect means 
that it grows out of the process of production itself. If production is 
to increase, the wants must be effectively contrived. In the absence of 
the contrivance the increase would not occur. This is not true of all 
goods, but that it is true of a substantial part is sufficient. It means that 
since the demand for this part would not exist, were it not contrived, 
its utility or urgency, ex contrivance, is zero. If we regard this pro- 
duction as marginal, we may say that the marginal utility of present 
aggregate output, ex advertising and salesmanship, is zero. Clearly 
the attitudes and values which make production the central achieve- 
ment of our society have some exceptionally twisted roots. 

Perhaps the thing most evident of all is how new and varied be- 
come the problems we must ponder when we break the nexus with 
the work of Ricardo and face the economics of affluence of the 
world in which we live. It is easy to see why the conventional wis- 
dom resists so stoudy such change. It is a far, far better thing to have 
a firm anchor in nonsense than to put out on the troubled seas of 


The Illusion of National Security 

On three nights late in July and at the beginning of August 1943, the 
heavy planes of the R.A.F. Bomber Command droned in from the 
Nor^ Sea and subjected the city of Hamburg to an ordeal sudi as 
Germans had not experienced since the Thirty Yean War. A third 
of the city was reduced to a wasteland. At least 60,000 and perhaps 
as many as 100,000 people were killed— about as many as at Hiro- 
shima. A large number of these were lost one night when a ghastly 
‘fire storm’, which literally biuned the asphalt pavements, swept a 
part of the city and swept everything into itself. Adolf Hider heard 
the details of the attack and for the only known time during the 
war said it might be necessary to sue for peace. Hermann Goering 
visited the city with a retinue to survey the darn^e and was ac- 
corded so disconcerting a reception that he deemed it discreet to 

Yet this terrible event tai^ht a lesson about the economics of war 
which very few have learned and some, indeed, may have found it 
convenient to ignore. The industrial plants of Hambtiig were around 
the edge of the city or, as in the case of the submarine pens, on the 
harbour. They were not gready damaged by the raids; these struck 
the centre of the city and the working-class residential areas and 
suburbs. In the days immediately following the raids production 
frltered; in the first weeks it was down by as much as 20 or 25 per 
cent. But thereafter it returned to normal. By then the workers had 
scanned the ruins of their former homes, satisfied themselves that 
their possessions and sometimes their families were irretrievable, had 
found some rude clothes and the shelter of a room or part of a room 



in a still habitable house, and had returned to work. On these three 
nights of terror their standard of Hving, measured by house-room, 
furnishings, clothing, food and drink, recreation, schools, and social 
and cultural opportunities, had been reduced to a faction of what it 
had been before. But the efficiency of the worker as a worker was 
unimpaired by this loss. After a slight period of readjustment, he 
laboured as diligently and as skilfully as before. 

There is a further chapter to the story. Before the attacks, there had 
been a labour shortage in Hamburg. Afterwards, despite the number 
killed and the number now engaged on indispensable repairs, there 
was no shortage. For, as a result of the attacks, thousands who were 
waiters in restaurants and ca&, attendants in garages, clerks in banks, 
salesmen in stores, shopkeepers, janitors, ticket takers, and employees 
in handicraft industries (which, being small and traditional, were 
more likely to be in the centre of town) lost their places of employ- 
ment. They had previously contributed nothing to war production. 
Their contribution to the standard of living proved dispensable. Now 
they turned to the war industries as die most plausible places to find 

Even in the presumptively austere and dedicated world of the 
Third Reich, in the third year of a disastrous war, the average citizen 
had access to a wide rat^e of comforts and amenities which habit had 
made to seem essential.^ And because they were believed to be 
ess^dal they were essential. On such matters governments, even 
dictatorships, must bow to the convictions of the people even if— the 
exceptional case— they do not share them. The German standard of 
living was fiur above what vras physically necessary for survival and 
efficiency. The R.A.F. broke through the psychological oicrustation 
and brought living standards down somewhere nearer to the physical 

^ In fact, in 1943 the Gennans were not concentrating their ene^es with parti- 
cular severity on war production. In this respect they were almost certainly behind 
the British at the time. Until not long before there had been a heady mood of 
victory with, inevitably, some relaxation. Quite a few of the Nazi leaden were 
sybarites and were thus somewhat handicapped in imposii^ austerities which they 
would not practise themselves. A dictatonhip vdiich does not quite trust its people 
is likely to be hesitant in imposing hardships. Finally, the strategy of industrial 
mobilisation was poorly undostood in Gennany and this strata assumed a short 
war. This fidlure of undentanding was most important of all and might be a lesson. 



minim um. In doing SO it forced a wholesale conversion of Germany’s 
scarcest resource, that of manpower, to war production. 

In reducing, as nothing else could, the consumption of non- 
essentials and the employment of men in their supply, there is a 
distinct possibiUty that the attacks on Hamburg increased Germany’s 
output of war material and thus her military effectiveness.^ 


On few matters docs tlie conventional wisdom have such authority 
as in mihtary poUcy and international affairs. The problems here are 
difficult and infinite in their ramifications. Old ideas and old formulas 
are rocks on which men can stand. They are cherished as much as 
new thought, which so adds to die complexity of an already uncer- 
tain and complex world, is resisted. Moreover, where military policy 
is concerned, die effect of peace is to exempt the convendonal wis- 
dom from any test by experience. Since, as noted, it is ordinarily only 
experience which eijqposes error, the conventional wisdom is here 
admirably protected. Countries have rarely gone to war, at least in 
the last century, without discovering that the military wisdom which 
they had treasured in the previous period of peace as the nearest thing 
to divine revelation was, when put to the test of circumstance, 
remarkably foolish. In the thirties few things were so thoroughly 
accepted as the invincibihty of the Maginot Line, the stalwart effec- 
tiveness of the French Army, the speed and effbrdessness with which 
American industry could convert to war, the dayhght bombing 
virtuosity of the A.A.F., the great effectiveness of blockade and eco- 
nomic warfare, and the congenital weakness of Russia. All when put 
to die test of experience wore found wanting. Understanding, as we 
do, the nature of the conventional wisdom, this will no longer 
surprise us. 

the years following World War n nothing had such massive 

^ These details are based on studies made in 194.5 hy the United States Strategic 
Bombii^ Survey (of which I was a director) which included a detailed investi- 
gation of the efiea of the Mambu^ raids. Ihe Germans had an understandable 
pride in the speed of Hamburg’s industrial recovery and detailed recoids 
which much fualitated the investigation. 


Standing in the conventional vrisdom as the proposition that there is 
a direct correlation between national power and economic output. 
National power and therewith defensive capabiUty and external 
security increased pari passu with increases in the Gross National 
Product. A country with a higher rate of increase was on the way to 
ultitnatc victory. ‘The ultimate survival of tlie &ee nations may well 
turn on their ability to develop their productive power. . . . The 
Soviet rulers arc counting heavily on the economic growth of the 

Soviet Union ‘On that day when the non-Communist world 

finds the way in which it can outrun the Communist world in the 
rate of growtli without using totalitarian means, Communism will 
be defeated— and until then it will not be.’* 

There was even a degree of quiet pride in die sophistication of such 
conclusions. Men at last saw the bearing of economics on military 
capacity. Until Napoleonic times armies freely destroyed the economy 
of a country, even a friendly one, in order to victual their troops. 
As late as World War I generals went ahead with military plans in 
blithe ignorance of the abiUty of the economy to supply the support- 
ing mathiel. Indeed it was the strategic pccuUarity of that conflict 
which first brought home the importance of economics. Men stood 
shoulder to shoulder in a continuous line from the Channel to 

* Assistant Secretary of State before Nindi International Banking Seminar, 
Rutgers University, Jdy 9, 1956. 

* Former State Department economist. New Republic, April 29, 1947. 

'While die conventional wisdom regularly accepts production, or rather the rate 
of increase in production, as the single and sufficient measure of national power, 
independent scholars have on occasion pressed the matter further. An interesting 
instance is an article by Mr. Peter Wiles (‘Growth versus Choice’, Economic 
Journal, vol. LXVI (June 1956), pp. 244-55). Mr. Wiles dismisses at the outset the 
notion that production can catch up with wants. ‘We need not here consider the 
possibility of an “exhaustion of consumption opportunities” . . . when produc- 
tivity is so great that all consumer needs can be satisfied. . . . Suchastateofaflairs, 
if possible at all, is obviously very fiu: off indeed.’ He then proceeds to argue the 
urgency of a greater rate of growth in the West so that more resources wiU be 
available for domestic investment and capital exports. But obviously, if growth 
itsdf fosters the wants— if the two are interdependmt— the extra resources will not 
become available for die purposes for vriiich he seeks them. Indeed the very 
question he poses, Growth venus Choice, is a fidse one if the promotion and 
manipulation of the chooting is part of die process of production a^ growth. 



Switzerland and had to be supplied. It was the highest tniHtary doc- 
trine that they could not advance except after a mighty eruption of 
steel and explosive. Thus it came to pass that even the most dashing 
cavalry officer could see that the scale of the supporting economy had 
something to do with the size of the supporting barrage.^ 

Aided by this background it became possible in World War II to 
persuade almost everyone that the might of armies was related to the 
might of the economics that suppUed them. The index of the latter 
was the Gross National Product. In the end victory did lie with die 
greatest G.N.P. This concept was then promptly embedded in the 
conventional wisdom as the new dimension of miUtary power. There 
it remains. And we react with satisffiction to die knowledge that we 
are avrare of something more subde than merely the bigness of the 
battalions. We are the viedms of a serious and possibly a dangerous 
new illusion. 


It will be evident, although this is only a first approximation, that it 
is not gross output but usable miUtary output which counts. If all 
that is produced is required to sustain civilian consumption and none 
remains for military use, then production may be large and military 
strength can be very small indeed. One must consider both die avail- 
able economic resources and the demands upon them. To talk of 
production without talking of related consumption is, obviously, 
like assessing the capacity of a barrel for catching water by consider- 
ing its size and ignoring the detail of whether it is already full. 

But there is much more to the problem. The size of the barrel 

^ Ludendorff, in a highly rhetorical observation, attributed the German defeat to 
the ‘pitiless efficiency’ of the American industrialists who he said understood war. 
In the conventional wisdom his compliment has the standing of canon law. No 
other observation has been more used to argue the importance of economic per^ 
fotmance for military power. In £u:t, Ludendorff did not know what he was 
talking about. A man of slight economi 'knowle^e, it would have been surprising 
if he had been able to relate economic to military power. British and French 
industrial power were, in bet, far more effective t^ oui own. The year and a 
half of our engagement was not sufficient to bring our matMet to die Western 
Front in decisive quantities and, in bet, our troops were extensively supplied with 
British and French weapons, as veterans of the conflict ate aware. 


becomes almost entirely irrelevant for measuring its ability to hold 
the rainwater if there are circumstances which trad always to keep 
it full. And this is the tendency of the economy, given ^e depen- 
dence eflfect. We increase its size but we do so by increasing, in one 
way or another, the demand for what it produces. This demand 
having increased along with the economy, it follows that there will 
never be much left over. If to increase economic output we must 
increase the desires for that output, things cannot be otherwise. If one 
more metaphor may be allowed, a balloon cannot be larger than the 
gas that is pumped into it. 

In part these relationships are simply ignored by the conventional 
wisdom. Total production is the accepted measure of total resources 
available for defence, and that is the rad of it. There are few enough 
solid truths in this world. Why doubt those we have? 

At a more sophisticated level, however, there is an unquestioned 
assumption that in any emergency civilian wants can be easily and 
quickly suppressed and the production that has gone into satisfying 
^em will then be available for public deployment. In &ct, as will be 
argued presently, the resources that best serve peace or survival may 
be most needed in peacetime— when no emergency has been pro- 
claimed which would justify cutting civilian wants. A society that 
expands production by expanding wants can never have a large 
margin available over seeming need. But the notion that production, 
given the dependence eSSxt, can be readily made available in time of 
crisis involves appalling contradictions. Ihey mig^t easily have be- 
come fatal had modem technology not rendered obsolete the con- 
cepts of defence to which they are relevant. 

For what is being suggested is that a society which in peacetime 
attributes the highest importance to the satis&ction of consumer 
wants— in which people are taught to believe that a great range of 
goods is essential for existence and elementary happiness— will, in the 
event of a national emergency, divest itself of these attitudes as simply 
and naturally as a man removes his nightshirt on atisii^. Needs so 
carefully nurtured will be forgotten. As a result, the capacity that 
supplied the goods can quickly be made available to the common 
e£R>rt. Having come to believe, like the people of Hamburg, that a 
given standard of living is minimal, and having been brought to this 



conclusion by the ei&rts of the world’s most capable propagandists 
and penuaders, supported increasingly by the nation’s most com- 
petent psychologists, they will divest themselves of this misconcep- 
tion ef&rtlessly and unreluctantly and reduce their standard of living 
as required. 

Patently this is nonsense— or at least a remarkable gamble. It is 
tantamoiuit to saying diat delusion will last imdl it is about to be- 
come fatal, at which point an onset of sanity is certain. It is fiur more 
likely diat, having been persuaded of the need for cats as part of our 
way of life and that need being further affirmed by a pattern of living 
that makes us dependent on them, we will remain persuaded of the 
need for cars. That means that we will need the petrol that powers 
them, the service stations that service them, the mechanics and the 
parts that keep them in operation, and even the new vehicles which 
replace the inevitable casualties of age and accident. As with cars so 
with kitchens, clothes, television, food, dishwashers, recreation, and 
nearly everything else. If we are committed to oil heat and oil 
burners in peacetime, will we be quickly uncommitted in time of 
emergency? Is it practicable to suppose we can be? If we believe that 
fresh firozen orange juice is essential for our peacetime health, will we 
be quickly unpersuaded under the threat of war? This is not a case of 
a democracy being unwilling to make sacrifices. It is the very difi^r- 
ent case of a people who have persuaded themselves that these things 
are essential and cannot be sacrificed. Though the bamboozling was 
infinitely costly, we arc none the less expected to believe tliat the dc- 
bamboozling will be a simple act of rational will. 

This argument must not be carried to extremes. Something can 
always be squeezed out. Some wants can be suppressed and some can 
be contracted. There can be savings here and there. And, thoi^ let 
no one seize on this as a serious concession, the savings, other things 
equal, can be larger in a large economy than in a small one. But the 
total of such savings cannot be equated with total production. Only 
a small part of the latter, in an economy where the depoidence effect 
is operative, can be made available. In past periods of crisis, the 
amount thus made available for defence was comparatively small. 
Far more impressive was the output that became available as the 
result of serious and deliberate, as distinct firom formal and passive, 


efforts to increase production.* We were saved, not by the size of the 
economy, but by our imused ability to expand it. 


Lest anyone suppose that this argument is academic, it is readily 
verified from experience, although in tlie central case of World 
War II, the lessons have been deeply disguised by the otherwise for- 
timate fact that we won the war. In 1941, as the danger of war 
became more and more evident, consumption was growing rapidly. 
This liigh and increasing level of consumption, together with 
domestic rearmament and aid to the British and other allies,* could 
not for long be provided out of the current capacity of the economy, 
at least without subjecting military supply to serious delays. Pro- 
posals were made in 1941 to cut back the production of civilian con- 
sumers* goods. These were fiercely resisted, most notably by the 
businessmoi who had come to Washington to help mobilize the 
economy. Motives were mixed, and the passion of the time produced 
many accusations. Jockeying for competitive position, the fear of 
loss of peacetime markets, the well-developed tendency of the busi- 
nessman in government to mistrust the long view and to assume that 
tilings will work out, all played a part. But underlying everything 
was the ultimate fact that people wanted the goods, regarded them as 
important, and that the men who made the goods shared the latter 
conviction and wanted to supply them. While there was a certain 
amount of intellectual resistance to these attitudes, they prevailed 
throughout 1941 and in an administration not noted for its identifi- 
cation with business. There were no important cutbacks in 1941, nor 
were any serious efforts made to arrest the increase in consumption. 
Had the New Deal been a business-orientated administration, the 
issue would scarcely have arisen. 

Nor did the situation change nearly as much as is commonly sup- 
posed after the outbreak of war in December of 1941. Although not 
without difficulty, the production of metal-using goods was cut 

* See pages 97-104. 

* Domestic rearmament began in a serious way in 1940 foUowii^ the M of 
France. The Lend-Lease bill was enacted early in 1941. 



dowa or suspended. War, more precisely an old-fashioned war, 
makes a special demand on metals. But the consumption of goods in 
the aggregate was not reduced. On the contrary, it increased in every 
year of the war. Measured in constant (1947) prices the supply of 
consumers’ goods available to and purchased by consumers increased 
firom $122*5 thousand million to $145*2 thousand million worth 
or by about $23 thousand million firom 1940 to 1945. In the next 
five firee and unrestricted peacetime years the increase was not over- 
whelmingly greater— it was a little tmder $38 thousand million.^ 
We did not use our productive capacity for war purposes in World 
War II in any meaningful sense. Rather we made concessions in our 
metal-producing and metal-using industries— it is significant that the 
Controlled Materials Plan, the most formidable and fiur-reaching of 
the wartime production controls, worked by limiting the use of a 
handful of scarce metals. We relied principally on our abihty, then 
especially large because of previous imcmployment, to increase pro- 
duction. An additional amount of capacity was obtained by the post- 
ponement of peacetime civilian investment. 

No one can doubt that it would have been profoundly difficult to 
arrest the increase in wartime civihan consumption. To reduce it in 
the absence of the assistance of enemy action as in Hamburg would 
assuredly have been formidable. This does not presuppose a shortage 
of patriotism. Rather it reflects the attitudes which ^e dependence 
effect makes inevitable. If people and their leaders alike arc persuaded 
that goods are important— as diey must if production depends on 
persuasion— they cannot be quickly persuaded that they are unim- 
portant. If a high standard of Hving is central in the American way of 
life, it will even be said that it is paradoxical to abandon it in a war to 
preserve the American way of life. With time and eflbrt the paradox 
can perhaps be resolved, but for that the leaden must have the 
requisite imdentanding. And leaden in a democracy are a part of the 

During World War II few things were so firequently emphasized 
as the importance of maintaining civilian morale. In the conventional 
wisdom of the time this was regarded as exceptionally important and 
exceptionally firaih It was also regarded as d^ending, all but exdu- 
^ Department of Commerce Estimates. Statistical Abstract, 195^. 


sively, on the supply of consumer goods and services— on the quality 
of die housing, the supply of petrol, the availability of recreation, 
even, as in the case of Los Angeles and other communities, the con- 
tinued operation of the race-track. Leadership attitudes, no less than 
others, accq>ted the need for the consumers’ goods and services 
which the dependence effect had made to seem urgent. The process 
of expanding production ensured that the production would not be 
readily available for other than civilian consumption. 

As noted we won the war. We had the good fortune to be on the 
side of overwhelming manpowo: and vasdy superior strategic 
position. We were blessed by the time in which to increase output. 
We had the support of two allies with far smaller productive plants 
but far greater abihty to use diem for military purposes. Ever since 
the war ended it has been a source of the most profound pride in the 
conventional wisdom that, while winning the greatest war in history, 
we were able to increase our dvdian consumption by nearly 20 
per cent. But had we lost there would have been a different, less 
comforting, though clearer view. Then discreet conversation, after 
dealing with the uncouth behaviour of the occupying army, the 
ambiguous reactions of a neighbouring daughter to rape, the ordeal 
of the Jews in the Bronx, and the increase in collaboration, would 
have turned to die management of die war. Generals might not have 
escaped rebuke. But certainly no one would have mentioned with 
mu^ approval the reemrd output of clothing in the years before the 
final defeat, the expansive food supply supported by special pro- 
visions in the draft, the exceedingly adequate supply of petrol, the 
remarkable raepansion of other civilian goods, the record rail travel, 
the way the railways were able, at the cost of a very large investment 
in rolling stock and roadbed, to accommodate the unparalleled 
volume of civilian and military business. It would then have been 
seen how Htde of our economic capacity we used for the war. It 
would then have been sensed that our presumed civilian needs kept 
miUions of men from facing the enemy or from supporting with 
weapons and supplies those who did. Fortunately we were saved the 
lesson. Unfortunately, given the power and the comfort of the con- 
ventional wisdom, it is mostly by such lessons that nations learn. 




There is a marked likelihood that the foregoing argument rests on 
military assumptions which are obsolete. We have probably had the 
last of die conflicts diat, even remotely, could be called a Gross 
National Product war. It is implausible to suppose that the United 
States will for a third time have a chance to mobilize and deploy its 
industrial resources in an orderly, undisturbed fashion while the 
enemy is fought by fnends on distant fronts. But attitudes on the 
relation of production to military power are rooted in the past. As 
always, the conventional wisdom must first be attacked on its own 

If one is condemned to consider the possibihties, there now remain 
very broadly two possible kinds of wars. One follows the pattern of 
the Korean war where the scale, objectives, and weapons are all 
circumscribed. There is also the atomic and thermo-nuclear holo- 

The aggregate output of the economy is obviously unimportant 
for the limited war. The U.S. economy was not tested by the 
Korean war, nor would it have been by several. The defeats in the 
early months were the result not of a shortage of ultimate resources, 
but of a shortage of trained manpower and weapons either in being 
or in position. The problem was not the potential but the prq>ara- 

The lack of preparation rested on two factors. There was the 
simple miscalculation of the likelihood of the event. But there was the 
further fact that during the preceding five years from 1945 to 1950, 
although production had been higher than ever before in peacetime, 
consumer requirements had been equally h%h as befits an economy 
where their level depends on the level of production. In consequence 
(though as always other forces were at work), military outlays had 
been kept to a level where they did not interfere appreciably with 
civilian consumption. 

Once the war broke out in Korea, the civilian economy and the 
effort to protect the conventional standard of living became an 
immediate and dear-cut threat to the efl^tive prosecution of the 


war. Consumers, anddpadng possible sliortages, immediately began 
to protect dicmsclves against a deprivation which, in light of their 
peacetime persuasion, they inevitably regarded as painful or even 
intolerable. They proceeded to the shops to equip themselves with 
cars, radios, kitchen durables, washing-machines, irons, furniture, 
canned goods, and other products in unprecedented volume. From 
the second quarter of 1950, the last three months of peace, to the 
third quarter, the first three months of the war, expenditures for 
national defence increased $1*8 thousand million. Consumer expen- 
ditures increased $13*1 thousand million. By the first quarter of 1951 
defence spending was up $12*9 thousand milUon as compared with 
the last peacetime quarter, but civUian spending had increased $19 
thousand million. Under these circumstances the size of the eco- 
nomy was almost irrelevant. The efforts of consmners to sustain (and 
given die uncertainties of the future, to ensure) what persuasion had 
caused them to regard as a minimum standard of living effectively 
pre-empted the total output of die economy and more. The result 
was a damaging inflation. In the early part of 1951 it was necessary to 
impose price controls. Meanwhile military production was increasing 
slowly and painfully in the face of the civilian competition for goods. 
The conventional wisdom continued to emphasize the importance 
of the size of the economy and its rate of growth in assessing our 
military power. 

Nor has further evidence challenged the cUchd.^ In the yean flrom 
1953 to 1957 theDepartmentof Defence was headed by Mr. Charles E. 
Wilson, a former President of General Moton. The Department 
of the Treasury was headed by Mr. George M, Humphrey, a former 
head of the M. A. Hanna Company. Both of these industrialists 
stoudy maintained throughout this period that what the United 
States could spend on defence was striedy circumscribed. It would be 
dangerous, they warned repeatedly, to spend more than we could 
afford. To do so would only bring comfort to our enemies, distress 
and consternation to our own people, and serious, thou^ mosdy 
unspecified, damage to our economy. 

Their position was widely criticized. Economists and journalists 

s Since diis was written, Russian technological advances have indeed diallenged 
the conventional wisdom at diis point. 




joined in emphasizing their error. The objects of the criticism were 
not notably impressed. Nor was there particular reason why they 
should be. They were accepting the position of their critics and 
carrying it to its inevitable, if absurd, conclusion. The critics them- 
selves asserted the importance of production for miUtary power. In 
doing so diey underwrote, without realizing it, the importance of the 
civilian goods being produced and hence tlie unavailabiUty of die 
capacity for miUtary purposes. Messrs. Wilson and Humphrey 
merely made diis point expheit. They noted, as must be so given the 
dependence effect, that consumption had grown pari passu with pro- 
duction, that to divert some of the latter to mditary purposes would 
be at the expense of consumption. And accepting the logic of the 
situation, along with the importance that society attaches to consump- 
tion, they concluded that tliis could not be afforded. Any other con- 
clusion would have been remarkable. Men who have spent their 
hves making cars, or providing raw materials to that industry, do not 
easily conclude that cars are unimportant. 

If production is held in liigh esteem, then we shall also esteem the 
goods we produce. As a result there will always be close limits on 
what we can spare for military purposes. Given the present economic 
goals, there always will be. The size of the economy, by which so 
many set store, is quite illusory as a clue to what is available. 

If a sizeable armed force is necessary for protection against small 
disputes— if men can devise no better arrangements for conciliation 
than recourse to arms— then productive virtuosity and growth are 
no guarantee that we shall have it. On the contrary, the processes of 
growth, as they now operate both on output and on wants, are as 
likely to be damaging as helpftd to such power. 


One of the tolerable features of old-fashioned wars was that the 
mihtary planner could proceed with his task in the reasonably secturc 
knowledge that in the event of hostihties someone else would be 
killed. This contributed to the interest and the sense of detachment 
which he brought to his task. Planning for thermo-nuclear warfare, 
the other type of conflict with which presumably we must reckon, is 


a more disenchantii^ task. These weapons make it likely that die 
planner, along with everyone else, will be extinguished under cir- 
cumstances which allow for a minimum of graceful gestures at 
the end. 

Yet if only for pressing home a point, it is evident that such con- 
flict will allow for no time-consuming conversion of consumers’ 
goods capacity and productive skills to war purposes, and it thus 
reduces nearly to irrelevance the bearing of civilian production and 
capacity on military power. 

The perilous strategy of deterrence, on which for the present we 
rely, places its emphasis on peacetime preparedness— on warning 
systems, interception, a retaliatory force in being, shelters and, per- 
haps most of all, a scientific dynamic of the highest order. But here, 
once again, the question is not the size of the economy, but how 
much can be diverted to public purposes. (This includes not only 
public spending for weapons and protection but also for schooling 
and training the highly developed manpower that is required.) The 
same process which makes the economy large makes large the private 
demands upon it and makes small what seemingly can be spared for 
public use. Even the conventional wisdom, with its reiterated em- 
phasis on the all-embracing importance of ou^ut, will occasionally 
concede the difficulty in extracting resources for tbe present purposes. 


The purpose of the foregoing argument is to deal with a myth— the 
mydi that military power is a function of economic output. If peace 
and survival are to be achieved, the search must almost certainly 
go beyond the effort to find a balance in thermo-nuclear terror. 
The present analysis bears strongly on ibis search. There will be 
occasion to return to these matt^, but a preliminary word is in 

The role of the rich man in the poor community has never been an 
easy one although it is notewordiy, considerit^ the number of philo- 
sophers who have dwelt on the miseries of riches, that £ew men of 
means have found it desirable to exchange their wealth for die more 
graceful situation of the insolvent. The American rich, as noted in 


Chapter Vn, have long since found it wise, as well as more fashion- 
able, to suppress the cruder manifestations of opulence. They now 
seek prestige not by determinedly adding to their hoard but in public 
toil and good works. The number of exceedingly well-to-do Ameri- 
cans who have made a success in politics as die accepted friends of the 
masses attests to the success of the formula. The rich may have their 
problems, but they are not insuperable. 

The analogy between men and states is an exceedingly perilous 
one, but here at least there is a parallel. We are led, as a nation, by our 
present preoccupations, to adopt numerous of the least elegant pos- 
tures of wealth. Though we have much, and much of the remainder 
of the world is poor, we are single-mindedly devoted to getting 
more. This is for the satisfaction of wants which our well-being has 
induced or which— and the advertising art is not one which by its 
nature can be concealed— we have synthesized. And we are, on the 
whole, rather solemn about the whole process. 

We do, each year, provide some aid for others. But first we have 
a prayerful discussion of whether or not we can afford the sacrifice. 
The question is, indeed, inescapable, since production keeps wants 
abreast of itself. Elsewhere in the world, however, it is our vast well- 
being and not the urgency of our need which is evident. The nine- 
teenth-century plutocrat who devoted his energies to expanding his 
already considerable income; who was led by his competitive posi- 
tion in the plutocracy to Hve on a suitably ostentatious scale; who 
found, as a result, diat his income was never entirely adequate; who 
came to the aid of the poor only after a careful consideration of their 
worth, his ability to spare from his needs and the realistic likelihood 
of revolt and disorder if he abstained; and who beUeved withal that 
God inspired his enterprise and generosity and often said so, was not 
in all respects an attractive figure. Thus with nations. 

Without entering further into the matter it is plain that our wealth 
is a valuable weapon. No other country has its equivalent. It is, pre- 
sumptively, a valuable instrument for reducing the tensions that grow 
out of privation, helping to organize international order and thus 
possibly to ensure survival. But as things now stand it is lai^ely un- 
available and to the extent that it is available its usefulness is gravely 


In recent times no problem has been more puzzling to thoughtful 
people than why, in a troubled world, we make such poor use of our 
affluence. Some failure of statesmanship has been regularly assumed. 
Now it is clear that the trouble lies mudi deeper. It is an aspect of our 
economic attitudes. It will persist as long as these remain imexamined. 


The Vested Interest in Output 

The notion of a vested interest has an engaging flexibility in our 
social usage. In ordinary intercoune it is an improper advantage 
enjoyed by a political minority to which the speaker does not himself 
belong, ^^en the speaker himself enjoys it, it ceases to be a vested 
interest and becomes a hard-won reward. When a vested interest is 
enjoyed not by a minority but by a majority, it is a human right. 
These conceptual pitfalls notwithstanding, the time has come for a 
survey of the vested interests in our present attitudes toward pro- 
duction. Who is most dependent on the present illusion? Who will 
be most affected when, under the onslaught of ideas, circumstances, 
and time itself, these matters come to appear in a clearer light? As a 
general makes a reconnaissance of the opposing forces, the author 
should know who is dug in against him. Moreover, along with the 
accepted theory of consumer demand and the conventional attitudes 
on national security, we must allow a place for self-interest as a 
bulwark of present attitudes. It is known to play a certain role in our 

Without question the individual with the greatest stake in the 
present economic goals is the businessman— more precisely, perhaps, 
the important business executive. If production is of preoccupying 
importance he, as the man with the traditional and established right 
to the title of producer, will be the dominant figmre in the social 
constellation. Society will accord him prestige appropriate to the 
role he plays; what may well be less important, he wiU be able, 
without difficulty or criticism, to command an income that is related 
to his prestige. As production has increasingly monopolized our 



economic attitudes, the business executive has grown in esteem. So 
long as inequahty was a matter of serious concern the tycoon had, 
at best, an ambiguous position. He performed a function of obvious 
urgency. But he was also regularly accused of taking far too much 
for his services. As concern for inequality has declined, this reaction 
has disappeared. The businessman is no longer subject to a serious 
cliallenge of any sort. Although in his hierarchical role in the large 
corporation he has, perhaps, been more successful than most in 
eliminating economic insecurity, both personal and institutional, he 
has even managed to retain a certain cachet as a risk-taker, a man who 
lives dangerously. No one questions the superior position of the 
businessman in American society. But no one should doubt that it 
depends on the continuing preoccupation with production. 

The case of water under conditions of plenty and shortage has been 
mentioned before. In the year 1950 the City of New York suffered 
from a potentially troublesome water shortage. Clouds were watched 
anxiously and seeded in the hope that they might yield their burden. 
With fanfare a programme of water conservation was launched. The 
washing of cars, dripping of taps, sluicing of streets, and cooling of 
air were all prohibited. Presiding over the considerable publicity 
wliich these results required was the New York City water com- 
missioner, Mr. Stephen J. Camey. For a time he was the most impor- 
tant man in the metropolis. His name was on everyone’s tongue. 
Mr. Camey was a public figure. Then the rains came, and the reser- 
voirs filled. Camey was forgotten. One day he was quietly dropped. 
No one noticed. 

The title of producer in our society seems securely honorific. The 
head of a distillery, a drive-in theatre, or a dog trade is a producer. 
He is not a basic producer which is better, but a producer none the 
less. As such he enjoys a position in the community as one of its 
supports or pillars and the sources of its wealth, whii^ is not neces- 
sarily mjoyed by the high-sdiool prindpal or the parish priest. It is 
as a producer that the president of the United States Steel Corpora- 
tion calls on the President of the United States. We are glad to see a 
department of government in the hands of a production man. 
Nothing better can be said of any individual than that he knows 
production. But the prestige of the producer is only the prestige of 



production. Should production ever come to be taken for granted, 
so, in some measure, will the producer. Mr. Carney is a warning. 


Men fight for what is important to them, and the businessman who 
senses his self-interest will battle vigorously for a value system which 
emphasizes the importance of production. Indeed, and perhaps more 
intuitively than otherwise, he already docs. The business liturgy now 
accords an important place to resonant assertions of the vital role of 
production. ‘ Only the productive can be strong. Only the strong can 
be free.’ ‘Production made America . . .’ ‘Let us stop bickering and 

The widespread suspicion and even hostility of businessmen to 
government, even when, as in the case of the Eisenliowcr Adminis- 
tration, it was presumptively sympathetic to business, is one of the 
great constants in our political life. In part tliis is because the business- 
man is a sizeable taxpayer and hence regards government services as in 
conflict with his economic interest. But we are too addicted in our 
social comment to a kind of mechanical economic determinism. 
Modem government also represents perhaps the major threat to die 
businessman’s presdge. To the extent that problems of military 
defence, foreign policy, agricultural administration, public works, 
education, and social welfare arc central to our thoughts, so the 
generals, foreign service officers, administrators, teachers, and other 
professional public servants are the popular heroes. Businessmen have 
almost certainly sensed this competition in modem times, and it is 
equally certain that it has conditioned their attitudes toward govern- 
ment. One of its manifestations is a vehement insistence that the 
government does not produce anything, that it is a barren whore. 
‘Government is powerless to create anything in the sense in which 
business produces wealth and individuals produce ideas [and] inven- 
tions. . . .’^ The case involves some rather strained argument— it 
makes education unproductive and the manuflicturer of the school 
toilet seats productive— but, none the less, it has a position of con- 
siderable prominence in the business hturgy. 

^ Sutton, et al. The American Business Creed, p. 195. 


A tension, perhaps ultimately more important, has also long existed 
between businessmen and the intellectuals. ‘The emergence of a 
numerous class of . . . &ivolous intellectuals is one of the least wd- 
come phenomena of the age of modem capitalism. Their obtrusive 
stir repels discriminating people. They are a nuisance.’^ As in the case 
of the government the basis of the tension has long been assumed to 
be economic. ‘The men whose research has given rise to new 
methods of production hate the businessmen who are merely inter- 
ested in the cash value of their research work. It is very significant 
that such a large number of American research physicists sympathize 
with socialism and communism. . . . University teachers of econo- 
mics are also opposed to what they disparagingly call the profit 
system. . . However, although the actual or suspected social radi- 
calism of intellectuals may well contribute to hostility between 
businessmen and intellectuak, it is most doubtful if the tension would 
disappear even were intellectuals to conform their social attitudes to a 
line laid down by Senator Jolm W. Bricker of Ohio. Scientists, 
writers, professors, artists are also important competitors of the 
businessmen for public esteem. 

This competition is especially noticeable in comment on public 
affairs— economic policy, foreign policy, the effect of government 
measures on popular morals and behaviour. Perhaps the most 
honorific function in our time is that of social prophecy. No one 
enjoys quite such distinction as the man who, by common consent, 
is allowed to look ahead into the unknown and tell us what will 
happen and advise us as to what we should do to promote or retard 
a particular occurrence. The intellectual naturally assumes his author- 
ity on these matters. He is likely to be gifted wdl beyond the busi- 
nessman in erudition and oral capacity. That felicity the businessman 
counters by stressing his identification with production. He is not a 
‘theorist’ but a practical man. He has the forthright approach of the 
man who knows how to get dungs done. He has learned about life in 
his own shop; this has provided him with a imique insight into how 

^ Ludwig von Miies, The Anti-Capitalistic Mentality (Princeton, Van Nostrand, 

*956), p. 107. 

*IbU., p. 20. Professor Mises, it should be observed in fairness, would be 
regarded by most businessmen as rather extreme. 



things are in the country at large or the world. Nodiing is more 
suggestive in our social attitudes than the notion that almost any 
issue, however cosmic, can be best appreciated by a man who has had 
some practical experience with a ladie. Were anything to happen to 
the prestige of production, it is plain that the businessman, whose 
mystique is his identification with production, would sufier severely 
in Iiis competition with the intellectual for the role of social prophet. 
If he wishes to defend himself in his present role, he must defend the 
importance of production. He can almost certainly be expected to 
do so. 

There will be occasion presently for a further word on the com- 
petition between the businessman and the intellectual for contem- 
porary esteem. 


Politics have long been known to make incongruous bedfellows. 
More rarely, however, have those between the same sheets remained 
largely unaware of their intimate if odd companionship. This is the 
strange case with the vested interests in production. Supporting the 
businessman on the all-importance of the production of goods is 
the professional American liberal. The prestige which the businessman 
derives from production is reinforced by the nearly full weight of 
American liberal and radical comment. The reason for diis alliance, 
though it requires some explanation, is not essentially complex. Men 
who hold tenaciously to a life raft may expect to be cast upon strange 
shores among strange companions. So it is with those who hold long 
enough to an idea amid dunging currents and tides. As so often 
happens, the course of developments in Britain, in broad contour if 
not in detail, has been much the same as in the United States. 

Until about twenty-five years ago the American liberal, so fiur as 
he was concerned with the total output of the economy, addressed 
himself to the problem of the efficient use of the available resources 
in capital, manpower, and materials. He insisted not without passion 
that this goal be not defeated by monopoly, tari£&, labour, or capital 
immobility, or other interferences with optimal use. To increase 
output by increasing the rate of capital fomution or by expanding 
the total labour force or by a serious effort to increase the rate of 


technological innovation was no more in die minds of liberals (or 
others) than now.^ Most important of all, the loss of production as 
the result of depressions was not peculiarly a liberal concern. No one 
was deeply committed politically on this problem; conservatives had 
an equal interest with liberals in ‘smoothing out’ the business cycle. 
During the decade of the twenties the political leadership in discus- 
sion of possible means to mitigate the business cycle was assumed by 
Herbert Hoover. 

The classical programme of American liberals, until the decade of 
die thirties, sought the redistribution of the existing income, greater 
economic security, and the protection of the liberties and immunities 
of individuals and organizations in face of the highly unequal distri- 
bution of economic power. The progressive income tax; the develop- 
ment of government services; the protection of public resources from 
private appropriation; the extensions of social security; aid to farmers 
or other especially disadvantaged groups; the strengdiening of trade 
unions; and the regulation of corporations all served these ends. 
None of these measures was thought much to affect the total output 
of the economy. 

All this changed very much during the decade of die thirties. The 
Great Depression brought production to a very low level. Between 
1929 and 1933 the gross output of the private economy dropped by 
between a third and a half. The sheer magnitude of diis movement 
focused attention, as never before, on movements in the total output 
of the economy and on their far-reaching consequences for economic 
and political fortune. CharactcristicaUy, to increase production was 
less central to men’s thoughts than to reduce unemployment. ‘Our 
greatest primary task is to put people back to work’, Roosevelt said 
in his first inaugural. But whether directly or as a by-product of the 
effort to reduce economic insecurity, expanded production began to 
acquire a growing significance to political liberalism in its American 

Then in 1936 came John Maynard Keynes. In the Keynesian system 
the notion of an aggregate demand for the output of the economy 
which determined the total production of the economy was central. 
Depending on various factors, production might find its equilibrium 

^ See page 102. 



at a high level or a low one. There was no immutable tendency for it 
to settle at the particular level where all willing workers had a chance 
for employment. And by manipulating the level of aggregate 
demand— die most obvious devices were to add to demand by 
government spending in excess of taxation, or to subtract &om it by 
taxation in excess of spending— the government could influence the 
level of production. 

The rewards flrom a successful operation on the level of output 
were breathtaking. To increase production was to ameliorate unem- 
ployment, agricultural insecurity, the threat of bankruptcy to the 
small businessman, the risks of investors, the financial troubles of the 
states and cities, even the wretched ovcrcrowdmg which results when 
people cannot afford to own or rent their own homes and must 
double up. Scarcely a single social problem was left untouched. And 
within a few yean after Keynes die level of production became the 
critical factor in war mobilization. It was principally by increased 
output (pages 133-5) tb'it we provided for the war. 

As a result, production did more than impress the Uberal. It became 
his programme, and it established something akin to a monopoly 
over his mind. Here was perhaps the nearest thing to alchemy that 
had ever been seen in the field of politics. Increased production 
solved, or seemed to solve, nearly all of the social problems of 
the day. 

Furthermore, at least for a time, the practical concern for the total 
output of the economy was a Hbcral franchise. Conservatives hesi- 
tated to abandon the balanced budget, for so long a canon of the 
conventional wisdom.^ To do so was essential. To manipulate the 
level of production also meant that the role of government must be 
enlarged. This too was impalatable to conservatives, for it accorded 
a prestige to government which had previously been accorded ex- 
clusively to private production. 

Most important of all for its influence on the liberal mind, the 
promise to raise production and reduce unemployment won elec- 
tions. From the late thirties to the early fifties ^e promise to main- 
tain high production and therewith high employment was the Hberal’s 

^Although numerous liberals, including unquestionably Roosevelt himself, 
were also reluctant. And some chose to become conservatives on the issue. 


major claim to votes in die United States, and it was unbeatable. 
Very nearly die same thing was true of the left in Britain. 

Liberal economic policy is still deeply preoccupied with produc- 
tion. As memories of the underproduction of the depression years 
have faded somewhat, the slogans have ceased to emphasize full 
employment and have come to stress the expanding economy. Plat- 
forms, manifestoes, and speeches develop the vision of a growing, 
ever more productive America. ‘ We have the resources and machines, 
the science and skills to expand production and consumption at an 
accelerating rate, even relative to our rapidly growing population. 
But we are not seizing boldly this historic opportunity.’^ The econo- 
mic creed of American liberalism is more production. This, it should 
be noted, is aggregate output. The question of the distribution of the 
product so produced— who gets it— is decidedly secondary. To be 
overly concerned with it is to seem a trifle old-fashioned. There is 
almost no concern at all over the kinds of private goods and services 
that are produced. All are important and the total counts. 


The preoccupation of the American liberal with production, it may 
be observed in passing, is an interesting example of the hold of the 
conventional wisdom in face of changing circumstances. In die two 
decades and slighdy more since Keynes’ General Theory conserva- 
tives, save on the extreme right, have swallowed their distaste for the 
measures diat the Keynesian programme requires and have impliddy 
adopted it. Neither the Eisoihower Administration in the United 
States nor the Conservative ministries of Churchill, Eden, and 
Macmillan in Britain were less committed in principle to full em- 
ployment and economic expansion than their Democratic or Labour 
opposition. Had it been thought otherwise they could not have won 

Moreover, die strategic position of conservatives, especially in the 
United States, is in some respects stronger in relation to this policy 
than that of liberals. Should it prove possible to maintain full em- 

^ From die introduction to ‘Consumption— Key to Full Prosperity’ by the 
Conference on Economic Progress, 1957, as printed in ADA World, May 1957. 



ployment for a considerable number of years, people will eventually 
forget to whom they arc indebted for originating the policy. They 
will cease to be impressed by the liberal claim to a patent on full 
employment policies. Producers will come to seem the natural 
custodians of production. Conservative businessmen, notUberal poli- 
ticians, will have the natural claim to oiHce on this platform. 

There is anotlicr curiosity of the hberal position. The issue on 
which he won during the thirties and which continued to bring him 
victories for another decade was the promise of the increased pro- 
duction that eliminated imemployment. This was something of 
massive importance. But having discovered production, he has re- 
mained with it. He has continued to stress the importance of the 
increased output in periods when that involved not the eUmination of 
unemployment but the increase in output of the already employed. 
He has believed, in brief, that increased production remains the 
touchstone of political success even when it involves additions to an 
already opulent supply of goods. Between increases in production 
that cure widespread unemployment and increases in production that 
add to affluence, there is a difference not in degree but in kind. In 
continuing to emphasize production, Hberals, who once had a great 
issue, have without realizing it come to possess no issue at all. Yet this 
is not surprising. No less than any others, Hberals accept the elaborate 
rationalization by which we persuade ourselves of the continued 
urgency of additions to our stock of consumers’ goods. 

Nor is there Hkely to be any change in the Hberal position in the 
near future. Few things arc so immutable as the addiction ofpoHtical 
groups to die ideas by which they have once won office. Conserva- 
tives can be reasonably assured of the continuing of unavowed sup- 
port of their opposition. Businessmen who depend for their position 
and prestige, and also for a goodly share of their poHdeal power, on 
the prestige of production will find that prestige eloquendy attested 
by Hberal manifestoes. The National Association of Manufacturers 
should make a token contribution to the treasury of the Americans 
for Democratic Action. 

However, this is a digression. For present purposes we need only 
observe that Keynes concentrated ffie eyes of Hberals on produc- 
tion, and their poHtical successes gave them a vested interest in it. 


Keynesian attitudes became, as ever, the new conventional wisdom. 
The liberal reaction to any questioning of the role we presently assign 
to production will, one imagines, be little less outraged than that of 


Browning observed that ‘Jove strikes the Titans down, not when 
they set about their motmtain-piling but when another rock would 
crown their work*. The position of our present economic goals could 
scarcely look more secure. Is there a chance, none the less, that this is 
their moment of weakness? 

That the security of our present preoccupation widi production 
qua production is formidable there can be no doubt. It has inherited 
the concern once felt for cquaUty. It is powerfully reinforced by the 
service it renders to economic security. It is rationalized by an elabor- 
ate and traditional, even if meretricious, theory of consumer demand. 
It has the sacred support of national security even though the relation 
may in fact add to our peril. For businessmen production means 
prestige. For Uberal poHticians it is thought to mean pubUc oflTice. 

Yet the goals may not be impregnable. There may well be some 
cracks in the facade. How significant they arc no one can guess. But 
they arc worth remarking. 

The prestige of production depends on the prestige of goods. In 
the more censorious social levels of American society there is already 
a well-developed and even ^hionable aversion to gadgetry. (The 
word gadget is itself a pejorative term for durable goods.) In such 
circles shiny rumpus rooms, imaginative barbecue pits, expansive 
television screens, and magnificent cars no longer win acclaim. They 
may even invite mild social obloquy. A degree of shabbiness in per- 
sonal attire is now occasionally sought, especially amot^ males. We 
have here what could be an indpimt revolt gainst goods or at least 
a refusal to allow competitive emulation to be the source of wants. 

Even more suggestive is the belief of the businessman that his 
position in the co mmuni ty is slipping. This is reflected in the recur- 
rent complaints that the coimtry does not appreciate the problems of 
the business executive, does not suffidendy accept liis advice and 
leadership, and that business is not ‘selling itself’ to the American 



people. This latter is also, and perhaps more immediately, related to 
the fear of unpleasant or inimical tax or regulatory legislation or the 
drift toward ‘socialism’. But even that implies that the country is 
insufficiently willing to accept the leadership and respect the warn- 
ings of businessmen. Neither Carnegie nor the elder Morgan thought 
it necessary to make such complaints. 

Equally suggestive, the businessman who is seriously in search of 
public esteem must now show that he is something more than a 
producer of goods. 

The rise of die public relations industry, which draws its clientele 
overwhelmingly from among business executives, shows that busi- 
ness achievement is no longer of itself a source of acclaim. At a mini- 
mum the achievement must be advertised. But the first task of the 
public relations man, on taking over a business client, is to ‘re- 
engineer’ liis image to include something besides the production of 
goods. His subject must be a statesman, a patron of education, or a 
civic force. Increasingly some artistic or intellectual facet must be 
foiuid. A businessman who reads Business Week is lost to fame. One 
who reads Proust is marked for greatness. 

These added requirements for esteem are unquestionably related 
to changing attitudes toward goods. In the early years of 'the car age 
it was sufficient for Henry Ford or R. E. Olds that they were makers 
of cars. What indeed could be a source of more acclaim? Now the 
car has become commonplace. And in the more recherche attitudes, it 
is even big, ungainly, and unfunctional in its shape and decoration. 
It is easy to see why the modem car manufacturer does not enjoy the 
eminence of a Ford or an Olds. 

As noted, the intellectual, along with tlie public official and poli- 
tician, is the natural competitor of the businessman for what may be 
called the solemn acclaim of the community.^ (Neither competes 
with Hollywood, baseball, television commentaton, or cafe society 
for what botii ^ree is the frivolous applause of the community.) In 
fact the position of the intellectual is almost certainly more secure 
than that of the businessman. It would hardly occur to a successful 
poet or scientist to hire a public relations man, just as it would scarcely 

* For a roughly similar conclusion see Russell Lynes, A Sutfeit of Honey (New 
York, Harper, 1957). 


seem wise for a successful coiporation president to do without one. 
Although the businessman must, increasingly, show diat he is at 
home with ideas, it does not occur to the philosopher or artist that he 
should show that he is a good businessman. Perhaps most suggestive 
of all, American intellectuals long ago created what amounts to a 
second-class citizenship for the intellectual efforts of the business 
executive. They listen to his speeches, review his books, and receive 
liis ideas with respectful attention. But diey do not judge them to be 
good or bad in themselves. They are good (or on occasion bad) for a 
businessman. It is well understood that this is a much lower standard. 

In Gabriel ChevaUier's Clochenterle the cure was by no means the 
leading figure in the village by the more ostensible standards of that 
agreeable community. He was a competent but not a brilliant 
drinker; he was prevented by the cloth from displaying the amorous 
enterprise by which the community set such store. But his ultimate 
triumph was complete, for he alone held the keys to heaven. In the 
United States no business executive has arrived imtil, on one sunny 
summer morning, he walks in procession with the right combination 
of solemnity and relaxed amiability and receives a reputable honor- 
ary degree. 

Still these are no more tlian straws in the wind. The miracle is still 
the prestige that we associate with production and therewith with 
producers. Nothing could be more remarkable than the beliefs and 
the illusions which have kept it intact since Ricardo. In doubting its 
supreme power we are challenging a phenomenon that is still of 
heroic proportions. 


The Bill Collector Cometh 

The situation is this. Production for the sake of tlic goods produced 
is no longer very urgent. The significance of marginal increments (or 
decrements) in die supply of goods is shght. We sustain a sense of 
urgency only because of attitudes that trace to the world not of today 
but into which economics was bom. These are reinforced by an un- 
tenable theory of consumer demand, an obsolete, erroneous, and 
even somewhat dangerous identification of production with military 
power, and by a system of vested interests which marries both liberals 
and conservatives to the importance of production. 

At the same time production does remain important and urgent 
for its effect on economic security. When men arc unemployed, 
society does not miss the goods they do not produce. The loss here is 
marginal. But the men who are without work do miss the income 
they no longer earn. Here the effect is not marginal. It involves all or 
a large share of the men’s earnings and hence all or a large share of 
what they are able to buy. And, we note, high and stable production 
is the broad foundation of the economic security of virtually every 
other group— -of farmers, white-collar workers, and both large busi- 
nessmen and small. The depression also remains the major uncovered 
risk of the modem large corporation. It is for reasons of economic 
security that we must produce at capacity. 

These simple conclusions will not be well regarded by the con- 
ventional wisdom. To urge the importance of production because of 
its bearing on economic security, and to suggest that the product is 
in any way incidental, is disturbing. It brings the economic society to 
the brink of the dubious world of make-work and boondoggling. 




One of the escapes from this world is to make all wants urgent, and 
no doubt we have here another reason for the obscurantist ration- 
alization of consumer demand. It still seems more satisfactory to say 
tliat we need the goods than to stress the real point which is that 
social well-being and contentment require that we have enough pro- 
duction to provide income to the willing labour force. But if anyone 
has surviving doubts as to where the real priorities lie, let him apply 
a simple test. Let him assume that a President, or other candidate for 
re-election to major public office, has the opportunity of defimding 
a large increase in man-hour productivity wliich has been divided 
equally between greatly increased total output and greatly increased 
unemployment. And let it be assiuncd diat as an alternative he might 
choose imchanged productivity which has left everyone employed. 
That full employment is more desirable than increased production 
combined with unemployment would be clear alike to the most 
sophisticated and the most primitive pohtician. 

The foregoing provides the basic rule of procedure for the re- 
mainder of tliis essay. It shows that we need not be much concerned 
with the supply of goods for their own sake. The urgencies here are 
foimdcd not on substance but on myth. And, indeed, our ultimate 
purpose is to see the opportunities that emerge as this myth is dis- 
pelled. But in all this we must be exceedingly conscious of the impor- 
tance of production for its bearing on the economic security of 
individuals. As a source of income for people its importance remains 
undiminished. This function of production must be carefully safe- 

But myth is rarely benign. And the system of illusions which 
causes us to attach sudi importance to production for its own sake is 
itself damaging or dangerous. One danger arises in the devices by 
which we fabricate wants and this, indeed, nurtures a threat to the 
security of employment and income which production provides. 
Our fiiilure to solve the problem of inflation is also the result of 
present attitudes toward the production of goods. And the way that 
present attitudes cause us to emphasize the supply of some as distinct 
from all goods and services is the source of deeper social dangers. To 
these problems, beginning with the dangers inherent in the presoit 
methods of manufiictunng wants, the essay now turns. 




The immediate danger in the way wants are now created lies in the 
related process of debt creation. Consumer demand thus comes to 
dqiend more and more on the ability and willingness of consumers 
to incur debt. And there are aspects of this debt creation which are 
inherently unstable. 

An increase in consumer debt is all but implicit in the process by 
which wants are now syndiesized. Advertising and emulation, die 
two dependent sources of desire, work across the society. They oper- 
ate on those who can afford and those who cannot. With those who 
lack the current means it is a brief and obvious step from stimulating 
their desire by advertising to making it effective in die market with 
a loan. The relation of emulation to indebtedness is even more direct. 
Every community contains individuals widi a wide range of differ- 
ence in ability to pay. The example of those who can pay bears 
immediately on those who cannot. They must incur debt if dicy are 
to keep abreast. The great increase in consumer indebtedness in our 
time has been widely viewed as reflecting some original or unique 
change in popular attitudes or behaviour. People have changed their 
view of debt. Thus there has been an inexplicable but very real 
retreat from the Puritan canon that required an individual to save 
fust and enjoy later. In fact, as always, the pieces of economic Ufc are 
parts of a whole. It would be surprising indeed if a society that is pre- 
pared to spend thousands of millions to persuade people of their 
wants were to fail to take the further step of financing these wants, 
and were it not then to go on to persuade people of the ease and 
desirability of incurring debt to make these wants eflective. This has 
happened. The process of persuading people to incur debt, and the 
arrangements for them to do so, are as mudi a part of modem pro- 
duction as the making of the goods and the nurtuiii^ of the wants. 
The Puritan ethos was not abandoned. It was merely overwhelmed 
by the massive power of modem merchandising. 

Viewing this process as a whole, we should expect that every in- 
crease in consumption wiU bring a further increase— possibly a more 
than proportional one— in consumer debt. Our march to higher 


living standards will be paced, as a matter of necessity, by an ever 
deeper plui^e into debt. The evidence is already impressive. The 
increase in living standards in the twmties was accompanied by a 
relatively much greater increase in comumer bo^wing. The same 
was true during the years of recovery in die thirties. It has been most 
spectacu larly the case since World War II. In the five years from the 
end of 1952 to the end of 1956 total consume debt (not including 
real-estate loans) increased from $27*4 thousand million to $41*7 
thousand million or by 53 per cent. Instalment credit increased by 
63 per crat and that for cars by nearly a hundred per cent. Although 
these were years of high prosperity, disposable income of individuals 
increased by only about 21 per cent.^ In 1955 one family in four of 
those with incomes between $3,000 and $4,000 bought a car, and 
69 per cent of those did so on credit. Of families with incomes 
between $4,000 and $5,000, more than one in three bought a car in 
that year, and 66 per cent did so on credit. Only among the families 
with incomes in excess of $10,000 did the proportion of cash buyers 
exceed the proportion of credit buyen. About 30 per cent of diose 
who bought cars on credit in 1955 had bought their previous car the 
same way and still had debt outstanding on that vdiicle.* 

One wonders, inevitably, about the tensions associated with debt 
creation on such a massive scale. The legacy of wants, which arc 
themselves inspired, are the bills which descend like the winter snow 
on those who are buying on the instalment plan. By millions of 
hearths throughout the land it is knovm that when these harbingers 
arrive the repossession man cannot be far behind. Can the bill col- 
lector be the central figure in the good society? 

In 1955 the median income of the American frmily before taxes 
was $3,960. Of all frmilies within the income range from $3,000 to 
$4,000, 48 per cent had instalment paymrats to meet. For nearly a 
third of those the payments commanded more than a fifUi of the 
family income before taxes. Among families in the next lower 
bracket— with incomes from $2,000 to $3 ,000—42 per cent had pay- 

^ Economic Indicators (Washington, U.S. Government Printing Office, June 1957). 

* Hiese data are all from Consumer Instalment Credit, pt. I, vol. I, Crowds and 
Import (Board of Governors of the Federal Reserve System, Washington, D.C, 




ments to make. Of these in turn 42 per cent had committed at least 
a fifth of their income for instalment payments, and one &mily in 
nine surrendered 40 per cent or more of its income to the bill 
collector.^ On the desirabUity of this cadi must dedde according to 
his own values. But there are associated economic dangers which are 
less subjective. 


In a society where virtuosity in persuasion must keep pace with 
virtuosity in production, one is tempted to wonder whether the fint 
can for ever keep ahead of the second. For while production does not 
clearly contain within itself die seeds of its own disintegradon, per- 
suasion may. On some not distant day, the voice of each individual 
seller may well be lost in the collective roar of all together. Like 
injunctions to virtue and warnings of socialism, advertising will beat 
helplessly on ears that have been conditioned by previous assault to 
utter immunity. Diminishing returns will have operated to the point 
where the marginal efiect of outlays for every kind of commerdal 
persuasion will have brought the average effect to zero. It will be 
worth no one's while to speak, for since all speak none can hear. 
Silence, interrupted perhaps by brief, demoniacal, outbursts of sales- 
manship, will ensue. 

Were this heroic eventuality to occur, there would, imguestion- 
ably, be some interesting problems of economic readjustment. There 
would be a coimterpart increase in consumer saving as the unper- 
suaded allowed their bank balances to grow and repaid their debts. 
Unless these increased savings were speedily offset by increased out- 
lays elsewhere— and the day on which die massed voices of die 
advertisers bring total cancellation of efiect will not be one of 
supreme business confidence and burgeoning investment spending— 
the result would be a decline in total spending and, therewith, in the 
total output of the economy. The further and more painful conse- 
quence would be an increase in unemployment and a reduction in 
other incomes— in brief, a serious curtailment of the social security 
of which production has become the servant.* 

* Ibid., p. no. 

* In the conventional wisdom, just as there has been hesitation in stressing the 
role of advertising and salesmanship in want creation so there has been litde ten- 


The less imaginative dangen arise in connection with consumer 
borrowing. Here trouble is already foreseeable. Indeed, it has already 
beoi accorded a degree of recognition in the conventional wisdom 
which has taken the usual form of assurances that there are no 
grounds for concern. 

As we expand debt in the process of want creation, we come neces- 
sarily to depend on this expansion. An interruption in the increase in 
debt means an actual reduction in demand for goods. Debt can be 
expanded by measures which, in the nature of the case, cannot be 
indefinitely continued. Periods for payment can be lengthened, 
although eventually there comes a point when they exceed die life 
of the asset which serves as the collateral. Down payments can be 
reduced, but eventually there comes a point when the borrower’s 
equity is so small that he finds it more convenient to allow reposses- 
sion than to pay a burdensome debt. Poorer and poorer credit risks 
can be accommodated, but at last it becomes necessary to exclude the 
borrower who, as a matter of principle, does not choose to pay. 

hi 1955, a year of especially urgent persuasion in the car market, 
the average repayment period on car instalment contracts was 
lengdiened firom an estimated average of 24*5 months in 1954 to 
28 months. The average down payment remained the same in the 
fiice of a substantial increase in the average retail price of cars pur- 
chased, and the average credit granted per instalment sale increased 
from $1,960 to $2,240.^ During 1955 the total volume of car instal- 
ment credit outstanding increased by $3*6 thousand million. 

This was a trend that could not be sustained. Although there was 
some further easing of terms the following year, the rate of increase 
in the volume of loans subsided. The result was a marked reduction in 
sales of cars — ^firom 7*9 million passenger vehicles in 1955 to 5*8 
million in 1956 — and in face of a continued increase in disposable 
income of consumen. Car centres experienced a perceptible amount 
of unemployment in a period of general prosperity. 

dency to explore our dependence on such persuasion. An esrception is Paul Mazur 
whose book The Standards we Raise (New York, Harper, 1953) has a forthright 
philistinism that, while it doubdess cost him scholarly attention, brought him 
refieshingly dose to the modem role of advertising and related activities. 

* The Standards we Raise, p. 128. 


This experience shows what could occur on a much wider canvas 
and with more serious consequences. No one can speak with con- 
fidence on the extent of the danger. However, few things are more 
satisfactorily established in economics than that debt creation, 
whether by producers or consumers, is a major source of uncertainty 
in economic behaviour. It has anciently been recognized that times 
of high income and employment and a generally sanguine outlook 
are oicouraging to both borrowers and lenders. The spending that 
results from these transactions adds to die general total of purchasing 
power when, in effect, it is least needed. Under less sanguine circum- 
stances loans are advanced more cautiously. Instead of spending from 
new loans, there is repayment of old ones and this, as perversely as in 
prosperity, occurs at the least propitious time. 

Borrowing, in the past, has been mainly by business firms for 
investment. For this reason business spending was regarded as the 
most mercurial of die three major categories of spending. Outlays 
by consumers and by government were, by contrast, regarded as 
comparatively reliable. ‘There is . . . general agreement that [general 
fluctuations in employment] show themselves predominandy in 
swings in the demand for labour for investment— chiefly for invest- 
ment in works of construction.’* ‘. . . movements in income, output, 
and employment are mainly characterized by fluctuations in the rate 
of real investment. Moreover, consumption rises or falls, in large 
part, in response to real investment.’* The effect of the expansion of 
consumer credit is to add an uncertainty, paralleling that which busi- 
ness borrowing brings to business spen^g, to the hitherto more 
reliable consumer spending. The instability may be greater, for the 
terms of consumer credit will be cased— down payments reduced 
and repayment periods lengthened— as an aspect of competitive 
merchandising techniques. In the case of business investment this is 
less likely to occur. 

In any case consumers will add the most spending from borrowed 

* A. C. Pigou, Itiame (London, Macmillan, 1946), pp. 89-90. 

* Alvin H. Mansen, Business Cycles and National Income (New York, Norton, 
I95i)> p- 17* Professor Hansen goes on to observe that consumer’s durables, 
including motor-can, can be an original source of fluctuation. These arc the 
consumer products principally associated with debt creation. 



funds to their spending from current income during the period when 
it is least needed. This will exaggerate inflationaiy pressures. And 
it is plain that a frmily that has committed 40 or even 20 per 
cent of its income to instalment payments will have to cut its current 
spending appreciably if one or more of its income earners lose their 
jobs. Thus an increase in unemployment, accompanied by the fear 
that it might get worse, could induce a general effort to avoid new 
debt and reduce the old. The further effect on consumer spending, 
thereafter on employment, and thence once again in reducing bor- 
rowing and magnif^g efforts to meet debts, could be considerable 
and disagreeable. 


By virtue of position, certain individuals in our society are accorded 
the privilege of stating as fact what, in the nature of things, is un- 
knowable. The tycoon and college president have well-recognized 
rights along these lines. Any candidate for public office may distin- 
guish with clarity between actions which will lead to unUmited 
prosperity and those which will lead to utter ruin. Secretaries of 
State may tell us by which actions our lives and Uberties will be pre- 
served to near eternity and by which they and we will be destroyed. 
In all instances those privileged as prophets are permitted to identify 
salvation with the action whicli at the moment they find most 
expedient. To a remarkable extent, considering dieir much more 
humble status, economists are allowed to tell what present trends in 
society wiU culminate in deep trouble and distress. In consequence, it 
would be entirely permissible to foresee the gravest results from the 
way consumer demand is now sustained by the rdmtless increase in 
consumer debt. 

In the course of its study of consumer credit in 1956, the Board of 
Governors of the Federal Reserve System concluded that while 
‘relatively little is known about the safrty margins in the finances of 
consumers who borrow on a short-term and intermediate-term 
instalment basis ... the evidence of a trend over past decades toward 
more liberal terms suggests that these margins are less than in earlier 
years’. Then, without throwing caution to the winds, it warned that 
‘the possibility of an episode of drastic and spiralling liquidation [of 

i 62 


this credit] should not be dismissed’. Thereafter, for purposes of 
practical action it did dismiss it. 

In fact we do not really know the extent of the danger. A tendency 
to liquidation of consumer debt, with accompanying contraction in 
current spendmg, could be offset by prompt and vigorous govern- 
ment action to cut taxes, increase public outlays, and so compensate 
with spending from other sources. On the other hand, such measures 
are subject to both psychological and procedural delays. Nothing in 
our economic policy is so deeply ingrained, and so little reckoned 
with by economists, as our tendency to wait and sec if tilings do not 
improve by themselves. In a time of receding income die income tax 
reduces itself automatically. Social security, &m and other payments 
have a similarly automatic tendency to expand. But taxation and 
expenditure beyond the range of these automatic stabilizers require 
Executive and Congressional action. Such decisions and action could 
be in a radically slower tempo from that of debt liquidation and the 
consequent slump in spending. 


In a society in which the production and sale of goods seems sacro- 
sanct there will be extreme hesitation over measures which will seem 
to restrain the financing of consumers’ goods and hence their sale. 
Measures to prevent the competitive liberalization of consumer 
credit terms will encovmter the heaviest resistance. When regarded in 
relation to the underlying interest in stability and economic security, 
such precautionary measures have a much stronger claim for atten- 
tion. They promise to help keep the process of synthesizing demand 
and the purchasing power to make it effective from damaging the 
continuity of production and employment. The regulation of the 
terms and conditions of consumer credit, while it has been under- 
taken in the past in wartime, is not a power presently possessed by the 
United States government. It is, however, a commonplace in the 
United Kingdom. 

However, the more substantial remedy lies deeper. Not all goods 
and services are subject to sale on die instalment plan and to the 
attentions of the bill collector. Cars and radios and wall-to-wall 



carpeting are; the services of the schools, hospitals, and public 
libraries are not. To the extent that an economy concentrates its 
efforts on the first it will be subject to the vagaries of want-cw/w-debt 
creation. As it devotes its energies to serving itself with health, educa- 
tion, and otlier like services, it will reduce its danger. We have 
already seen that die preoccupation with production is a selective 
one. In particular it is heavily centred on those goods which by their 
cliaractcr or by tradition are in the domain of private production. It 
concentrates energies, in other words, on producing the products 
which are subject to the greatest instability. It carries this indeed to 
the point where die manufacture of wants may itself be a tenuous 
process. A different arrangement for satisfying our needs— one, for 
example, that allotted a larger proportion of resources to those needs 
that are in the public domain— would thus be an important step 
toward stability. In one of the paradoxes widi which economics is 
replete it might even, by contributing to the reliability of production, 
ensure a greater total private product. 

However, once again this is to run aliead of the story. We are 
concerned for the moment only with the tensions and die dangers of 
a society in which the pursuit of goods is paramount and wliich does 
not pause to reflect on the devices— mass persuasion leading on to 
mass encouragement to indebtedness— wliich further the chase. We 
now turn to another of the tensions of diis society. 



Through most of man’s history the counterpart of war, civil dis- 
order, famine, or other cosmic disaster has been inflation. In recent 
times inflation has acquired new habits: it persists in periods of peace 
and high and rising prosperity. This tendency has been strongly mani- 
fest in the United States and especially in the decade and more follow- 
ing World War II. In these years the prices of a large range of indus- 
trial products— steel and steel products, machinery, machine tools, 
farm equipment, many non-ferrous metals and their products— 
moved steadily upward. Steel prices, in the mid-fifties, were increas- 
ing at a rate sufficient to double their level every decade. In some 
years, 1955 and 1956 for example, new high levels of living costs 
were posted month after month with monotonous regularity. 

The public response to this recurrent inflation has been interesting. 
It has been widely deplored and condenmed. Politicians of both 
parties have taken a strong position against it. Conservatives, 
anciently the selfdesignated custodians of the ‘honest dollar’, have 
continued to stress this tenet of their faith. Businessmen, bankers, 
iiuurance executives, and nearly every type of professional public 
spokesman at one time or another have warned of the dangers of 
continued inflation. Meanwhile liberals have deplored failure to take 
efi^tive action while proposing none themselves. Next only to the 
virtues of competition, tliere is nothing on which the conventional 
wisdom is more completely agreed than on the importance of stable 
prices. Yet this conviction leads to remarkably little effort and, 
indeed, to remarkably few suggestions for specific action. Where 
inflation is concerned nearly everyone finds it convenient to confine 




himself to conversation. All branches of the conventional wisdom 
are equally agreed on the undesirability of any remedies that are 


There are several reasons for this barren position. First, to be sure 
some reap material benefit fiom inflation. They too oppose it, for 
reasons of respectability, but their opposition is less than impassioned. 
Of importance also is the influence of inaction— or postponement— 
as a policy. This docs not reflect mere negativism, as is often supposed 
and even more frequently charged. As noted, in die nineteenth cen- 
tury model of the competitive society, a rhythmic sequence of expan- 
sion and contraction in economic activity was assumed. The expan- 
sion was accompanied by rising prices; in the contracting phase these 
gave way to filling prices. The movements in cither direction were 
thought to be self-limiting. Thus if prices were rising one had only to 
wait. Presendy they would reverse themselves and begin to fall. 

In the course of time confidence in the self-limiting character of 
these movements was seriously weakened. This was especially true 
as regards die period of contraction or depression, and the Great 
Depression dealt a decisive blow. Although as late as the early thirties 
it was a tenet of the conventional wisdom that in depressions the only 
appropriate course of action was a severe ‘hands-off’ policy, govern- 
ment intervention against depression is now regarded as inevitable. 

However, there was never any equally dramatic assault on the 
older confidence that rising prices and inflation would cure them- 
selves. Keynes led the attack on the conviction that depressions were 
sclf<orrecting by picturing the possibility, indeed the probability, 
that the economy would find its equilibrium with an unspecified 
amount of unemployment. Dozens seized his point and sought to 
penuade the politicians and the public. The notion that, in peace- 
time, prices might as a normal thing rise continuously and persistently 
has had no Keynes. 

Thus the conviction, or more precisely the hope, has remained 
that peacetime inflation might somehow be self-correcting. This is 
not a hope in which even conservatives repose very great confidence. 
But in combination with the belief, so common in recent years, that 



the behaviour of the economic system is bound to be ^vourable if 
only earnest and God-fearing men are in command of its destinies, it 
provides a strong reason for always waiting to sec if prices won’t turn 
down by themselves. Even liberals, who are required to advocate 
although not to specify action to prevent inflation, are in practice 
likely to be tempted to wait and see. 

This disposition to inaction is reinforced by the belief, of strong if 
diminishing influence ever since the thirties, that the most grievous 
threat to the American economy is a depression. If this danger lurks, 
however obscurely, around the comer, then there is all the less reason 
to act to control inflation. For inflation may any day come to an end 
in the thunder of economic collapse or tire lesser misery of a few 
million unemployed. These eventualities are much more grave than 
rising prices. We are especially hesitant, knowingly at least, to invoke 
measures which might precipitate them. Some inflation remedies 
miglit do so or, at any rate, be blamed. 

However, the forces which act to make inflation a peculiarly un- 
manageable problem in our time arc embedded much more deeply 
in the fabric of our social Ufc. We are impelled, for reasons of econo- 
mic security, to operate the economy at a level of output where it is 
not stable— where persistent advances in prices are not only probable 
but normal The remedies that would be effective collide witli the 
urgencies of production for purposes of economic security. Or they 
are in conflict with attitudes which emphasize die importance of 
economic growdi and of unhampered markets for the efficient use of 
resources. This conflict has been further complicated by what is in 
part a belief, in part a hope, and in part a faith that the conflict can be 
evaded. The means to this evasion is the manipulation of the mone- 
tary supply— what economists have come to call monetary policy. 

We shall look fint at the nature of inflation and its consequences 
and then, in the next chapter, at the hope, never so strong as in recent 
times, that the conflicts which it presents might somehow be elided 
by monetary policy. Then we shall examine the unresolved conflict 
between the other remedies and the store we set by economic 
security and also by economic growdi and unhampered markets. 




Inflation— persistently rising prices— is obviously a phenomenon of 
comparatively high production. It can occur only when the demands 
on the economy are somewhere near the capacity of die plant and 
available labour force^ to supply them.® When supply cannot be 
readily increased, as will be the case at capacity production, further 
increases in demand are capable of bringing price increases. A dis- 
tinction must be made between two parts of the economy. In diat 
part of the economy where, as with agriculture, there are many pro- 
ducers and an approach to what economists term pure competition, 
no individual seller controls or influences prices. There prices will 
move up automatically in response to the increased demand. In die 
typical industrial market— steel, machinery, oil, cars, most non- 
ferrous metals, chemicals— a relatively small number of large firms 

^ Capacity use of plant may be defined as that point where any further increase 
will incur abruptly rising short-run marginal costs. These costs will be above die 
long-run costs after plant expansion. Full employment or full use of the labour 
force may be defined as the point where, similarly, additional labour effort is 
forthcoming only at steeply rising marginal cost. In the ensuing chapters I speak 
jointly of the capacity of plant and the labour force. In any given situation one or 
the other can be the limiting factor and the source of the rising marginal costs. 

® I have written a good deal— more, I suppose, than on any other economic 
subject— on various aspects of the inflation problem, and I am concerned to avoid 
repeating myself unnecessarily here. I have dealt with inflation in the general 
context of big firms and unions in the final chapters of American Capitalism: The 
Concept of Countervailing Power, The dieorctical implications of the coexistence of 
competitive and oligopolistic market structures and the absence of full short-run 
maximization by the latter are developed in ‘Market Structure and Stabilization 
Policy’, Review of Economics and Statistics (Cambridge, Mass., May 1957), and 
summarized in non-teclinical form in a statement prepared for the Sub-committee 
on Antitrust and Monopoly, Committee on the Judiciary, of die United States 
Senate (Hearings, ]viy ii, 1957)* My views on the inflation problem have changed 
(and I tnist developed) over the years. In particular 1 regard the ensuing statement 
of the causes of inflation, though similar in broad contour, to be somewhat more 
precise than that in American Capitalism. The point of departure that inflation is the 
central problem of the economy of countervailing power is of course the same. 
The years since 1952, when this book was published, have, I think, provided a 
good deal of dismal verification of the point. 



enjoy, in one way or anodier, a considerable discretion in setting 
prices. In diese markets— those characterized by what economists call 
oligopoly— as capacity is approached it becomes possible and profit- 
able to mark up prices. The fact that all firms are at or near capacity 
is assurance that no firm, by holding back, will capture an increased 
share of the market. It cannot supply it. Nor imder these circum- 
stances is there danger that there will be extra stocks lurking around 
at a lower price. 

At this point it is necessary to foreclose on what is perhaps the 
commonest error in contemporary attitudes toward inflation, al- 
though die point is well understood by economists. This is the almost 
inevitable temptation to regard increased production as a remedy for 
inflation. It is the most natural of errors; the first thoughts on the 
matter are wonderfully simple and forthright. If inflation is caused by 
output pressing generally on capacity, dien one need only get more 
capacity and more output and dius ensure that this tension no longer 
exists. But as just a moment’s further thouglit will suggest, additional 
all-round production, even when it can be readily obtained from 
existing capacity, will pay out, in wages and other costs, the income 
by whicli it is bought. Wc have seen, moreover, that wants do not 
have an origin that is independent of production. They arc nurtured 
by the same process by which production is increased. Accordingly, 
the effect of increased production from existing plant capacity is to 
increase also the purchasing power to buy that production and the 
desires which ensiure that the purdiasing power will be used. 

But there is worse to come. If production is at capacity, increased 
output win naturally require an increase in capacity. The increased 
investment that this implies will, in the form of wages, payments fi)r 
materials, returns to capital and profits, add to purchasing power and 
the current demand for goods. It does so before the added capacity 
resulting from the investment is in place to meet the demand. Thus 
die e&rt to increase production adds to the pressure on current 
capacity— and to the prospect for inflationary price increases. 

A cat chasing its own ^ may, by an extraordinary act of feline 
dexterity, on occasion succeed in catching it. To overcome inflation 
by increasing production, while superficially similar, will not so oftoi 
be successful. 




The response of the economy, whoi it is operating at or near capa- 
city, to an increase in demand vnll not be uniform for all industries. 
As just observed in the competitive industries, i.e. those where prices 
are set impersonally by the market, any increase in demand when 
supply can no longer be readily expanded will, predictably, raise 
prices. Similarly a reduction in demand will reduce prices. However, 
in the characteristic industrial market— those of oligopoly and ad- 
ministered prices— the increase in demand must be implemented by 
a specific decision by the firm to change its price. This decision may 
be delayed for a variety of reasons: inertia; the need to establish a 
consensus on the extent of the increase imder circumstances where 
the anti-trust laws forbid formal communication between firms; the 
feat of an advene public reaction to the price advance; the fear that 
over a longer span of time the price increases will be damaging to the 
competitive position of the firm or industry; and the possibility of 
attracting the attention of the union and stimulating wage demands 
all may lead to delay. (It is worth repeating that this kind of price 
behaviour can occur only in that part of the economy where pro- 
ducen are sufficiently few and are otherwise so situated as to have 
power over their own prices. Such behaviour is not vouchsafed to 
the farmer or to the businessman who is one of many in the market.) 
For many of the same reasons price increases, when they occur, will 
not bring prices to the point where they maximize the short-run or 
current returns of the company. It is in the long-run that the cor- 
poration lives. It is the return over the fullness of time which is rele- 
vant to managerial calculation. If the prices that maximize profits at 
the moment will brii^ wage demands that will threaten the cost 
position of the company over time; or if there promises to be long- 
run danu^e to the competitive position of the company; or if the 
public reputation will be hurt, than short-run maximization of 
return does not accord with self-intorest even whoi ffiis is defined 
in the narrowest of pecuniary terms.^ The firm will not proceed to 

^It teems likely that many economists have been reluctant to concede the 
possibility of sudh ‘lestiaint’ in pricing because it seemed to be in ccmflict with 
selfmtetest hi &ct, no such forbearance need be involved. 




maxitnize its current return unless something happens— an important 
point— to make this possible without damaging the longer-run 

Two things follow. In a period of hi^ and rising demand, short- 
run possibihties for increasing prices are likely to run ahead of the 
long-run assessment of where prices should be. Therefore, firms in 
the typical industrial market are likely to have what amounts to a 
reserve of unliquidated gains from unmade price advances. Unlike 
the farmer or other competitive producer, who is effectively isolated 
from any such opportunity, firms in these markets could exact higher 
prices than they do. They will do so if circumstances so change as to 
make short-run maximization more nearly consistent with the firm’s 
view of its long-run interest. 

As a result price increases in these industries are not tied tightly to 
capacity operations or, as in competitive industries, to rising demand. 
Demand in (say) the steel industry nuy &11 to something less than 
capacity levels, but if there is an unUquidated gain, and something 
alters the relation between short- and long-nm maximization so as to 
make the former more feasible, prices will still be increased. As just 
stated, this can happen when demand is falling. In the competitive 
industries, output being given, prices will never go up except by 
reason of an increase in demand. When demand falls, prices predict- 
ably will faU.^ 

While prices in the administered price industries may rise in fiice of 
some excess capacity and fall in &ce of falling demand, the scope for 
such movements should not be exaggerated. Excess capacity, if it is 
considerable, will increase the danger that some firm will f^ to go 
along or, at a later date, resort to surreptitious price-cutting. These 
dangers will act to oihance the doubts about the wisdom of raising 
prices to maxiinizc short-run gains and increase the reluctance to do 
so. There will be similar and perhaps stronger fear of the longer-run 

^ These movements will be affected, also, by differential movements in demand 
and also difierences in the rate at which different industries adapt their plant to 
changes in demand. To stress the role of unliquidated gains— in the absence of 
which one cannot satisfactorily explain the ability of industrial firms to respond as 
they do to wage increase— is not to exdude these commonplace effects. Cf. the 
article by Robert Solomon, ‘Galbraith on Market Structure and Economic 
Stabilization Policy*, and my comment. Review of Economks and StatistUs, 1958. 



consequences of such price increases when demand is falling. The 
action may have to be reversed. Perhaps meanwhile wages will have 
moved up partly because of the price increase. The important point 
is only that in industries characterized by oligopoly the relation be- 
tweoi demand, capacity, and price has a degree of play. Prices are not 
restricted immediately demand is curbed or excess capacity appears. 

In the inflation drama it remains only to introduce Hamlet. That, by 
common consent, is the union. It is the instigator presumptive of that 
most familiar of economic phenomena, the wage-price spiral. 

The role of wages in relation to inflation has long been a trouble- 
some matter for economists. Obviously wages have something to do 
with price increases. Yet it is plain that a firm that advances its prices 
after a wage increase could have done so before. At the previous 
lower costs and the higher prices it would have made more money. 
The wage increase did nothing to enable it to get the higher price. 
An advance in steel wages adds only infinitesimally to the demand 
for steel-mill products and only after a time. In any evoit this is not 
something which steel firms take into consideration in their typically 
prompt response to a wage increase.^ 

The explanation lies in the existence of the margin of unliquidated 
gain and in the further fact that the wage advance, of itself, promptly 
increases the opportunity for short-run maximization in relation to 
long-run maximization. This is most obviously the case whoi the 
firm has been unwilling to advance its prices becatise of fear that it 
would attract the attention of the union which would press for wage 
increases. Now the union’s attention has manifestly been attracted, 
and there need no longer be any reluctance on diis score. The danger 
of an adverse public reaction is also least at such times. The public will 
ordinarily attribute the advance in prices to the union. In steel and 
other industries, there is now a well-established policy of making the 
occasion of a wage increase the opportunity for a rather larger 
increase in prices and company revenues. 

^ It is, of course, a part of die progressive eiqiansioa of money incomes which 
sustains the iqdationary movement. But it is still true that the price increase pre« 
cedes and ioa not follow die expansion in income. 


This is the core of the rdation of wages to prices but not quite all 
of it. It would be wrong to suggest that die initiative to the whole 
movement lies with the wage demand of the unions. Living costs 
rise, eroding the last wage gains and stimulating efforts to recoup. 
And when demand and responding production are at capacity levek, 
profits will ordinarily be good. These in turn act as the lodestone to 
union demands. In the appropriate industries the unexploited oppor- 
tunity for price increases can now be sdzed. So it goes. One cannot 
single out a particular spoke in a wheel, paint it black (or red) and say 
that it shoves aU the othen. However, its futility as a subject of social 
controveny notwithstanding, nothing is more debated dian the 
relative responsibility of workers and employers for the price ad- 
vances which comprise inflation. 


As stated, the wage, price, and profit spiral originates in the part of 
the economy where firms with a strong (or oligopolistic) market 
position bargain with strong unions. These price movements work 
themselves through the economy with a highly diverse effect on 
different groups. Where firms are strong in their markets and unions 
are effoctive, no one is much hurt, if at all, by inflation. Concern over 
the problem will be marked by the fortitu^ with which we all are 
able to contemplate the sorrows of others. Elsewhere the effoct will 
be highly mixed. Those individuals and groups will suffer most who 
have least control over their prices or wages and hence the least 
capacity to protect themselves by increasing their own return. Or if 
such control, as in the case of agriculture, is slight, thoi the effect will 
dq>end on whether the income elasticity of the demand for the parti- 
cular product— roughly the effect of increased incomes on the 
demand for the product— is small or great. And something will 
d^end also on whether the particular producer’s costs are a^cted 
promptly or belatedly by the increase in prices. 

Thus, by way of illustration, farmen have little or no control over 
the prices at which they seU their products. Inflation reaches them by 
way of impersonal market movements. For the wheat or potato 
farmer the income elasticity is very low— as wage incomes rise 



individuals spend no more for bread or potatoes, and for potatoes 
there is indication that they spend less. Meanwhile the farmer’s costs 
of fuel, fertilizer, and other factors firom the oligopolistic sector of the 
economy vnll have risen. For the beefcattle producer, by contrast, 
income elasticity is rather higher. He is die beneficiary of the well- 
known and statistically quite demonstrable tendency of people who 
have an increase in pay to celebrate with red meat. Other things 
equal, and in the catde business they frequently are not, his position 
will be happier than that of the producer of bread, grains or potatoes. 

Such discrimination is pervasive. The individual or firm which, 
either in line of business or as the result of speculative acumen, holds 
large unhedged inventories, benefits from the increased demand for 
these and firom the consequent increase in price. 

At the other extreme are those who experience the rising costs but 
whose own prices remain largely unaffected because they are fixed by 
law or custom or, at a minimum, by someone else. This is the posi- 
tion, during inflation, of the teacher, preacher, public servant, of 
(in general) the salaried professional and white-collar community, 
and of those who in effect are reaping the reward of past services to 
society in the form of pensions or other such payments. The result of 
rising costs and comparatively fixed returns for all of these groups is 
much too familiar to require exegesis. Those on pensions sufler 
severely. Those who depend for their pay on the public treasury are 
also especially likely to sufler during motion. Like all others they 
experience the increase in prices. Their income for a variety of 
reasons is almost certain to lag. This lag is of considerable conse- 
quence, and it is something to which this essay will return. 

Not all vendors of professional services do suflfer. Occasional 
groups have discretion over their prices and are able to tahe prompt 
advantage of the general increase in money wages and demand, to 
raise tiieir own charges and revenues. Lawyers and docton normally 
fall in such a category. There are others. In 1942 a grateful and very 
anxious citizenry rewarded its soldiers, sailors, and airmen with a 
substantial increase in pay. In the teeming city of Honolulu, in 
prompt response to this advance in wage income, the prostitutes 
raised die prices of their services. This was at a time when, if any- 
thing, increased volume was causing a reduction in dieir average un it 



costs. However, in this instance the high military authorities, deeply 
angered by what they deemed improper, immoral, and indecent 
profiteering, ordered a return to the previous scale. 

In a firec market, in an age of endemic inflation, it is unquestionably 
more rewarding, in purely pecuniary terms, to be a speculator or a 
prostitute than a teacher, preacher, or policeman. Such is what the 
conventional wisdom calls the structure of incentives. 


In basic outline the requirements for inflation control will now be 
clear. When the economy is at or near capacity, firms in the concen- 
trated sector can advance their prices and will have inducement from 
advancing wages to do so. Such price increases, widi dieir further 
effects, will be prevented only if there is slack in the economy. Then 
various restraints begin to operate on the price advances, on the 
firms in granting wage advances, and on imions in asking for them. 
But, since firms may have unliquidated gains when operating at 
rather less than capacity, this slack in the absence of other measures 
may have to be considerable. In the years following World War II, 
prices continued to rise in much of die oligopolistic sector of the 
economy; i.e. where strong unions bargained with strong firms right 
through the recessions of 1949 and 1954. Prices as a whole were stable 
only because those in the more competitive markets were falling. 
While exceptional circumstances may intervene, we would certainly 
be wise to expect inflation whenever demand is strong and rising and 
imemployment is below, say, three or four million. 

Were it possible to prevent wages from reacting on prices, and 
vice versa, Aen it would be possible to have price stability with pro- 
duction a good deal closer to current capacity and full employment. 
Wage movements would not then serve as a reason for raising prices 
and as a justification, or cover, for adding to profits. The derived 
efl^ of these increases on other sectors would be eliminated. It 
would thus be possible to have higher output and employment with- 
out inflation. 

In the past there has been much argument whether, in the strategy 
of inflation control, one should seek to come to grips with the level 



of demand (in relation to the capacity of the economy and the labour 
force) or whether one should seek to deal with the wage-price spiral. 
Economists have generally empliasized the importance of the level of 
demand; to the layman the wage-price spiral has always seemed the 
phenomenon that most obviously required attention. The proper 
answer is that both are important. Inflation could be controlled by a 
sufficiently heavy reduction in the level of demand. It could be con- 
trolled with a less drastic reduction if something could be done to 
arrest the interaction of wages and prices or, to speak more precisely, 
of wages, profits, and prices. 

The conflicts here will be evident. The introduction of slack, 
especially if it must be considerable, is in conflict with the impera- 
tives of economic security. And the use of controls is in conflict with 
the ancient conviction that resources must be allocated efficiently 
between their various employments and diat the free market is the 
most efficient and possibly even die only satisfactory instrument of 
such allocation. Setting the store that we do by the production of 
goods, we have here a seemingly decisive argument against the use 
of controls. 

We shall have occasion to examine diis conflict more closely 
in the next chapter but one. But first it is necessary to look at the 
effort to avoid the conflict entirely by use of monetary policy. 



The Monetary Illusion 

In Britain throughout the nineteenth century the Bank of England 
was able through the increase or decrease of the bank rate— in prin- 
ciple the rate of interest at which it stood ready to lend money to 
those who in turn were in the business of lading money— to have a 
measinre of influence on the British banking and business life. The 
circumstances were imdoubtedly favourable. The world was mostly 
at peace. There were no restraints on the international movement of 
capital funds; these were free to move anywhere in pursuit of a 
higher return. An increase in the rate would bring funds from abroad 
to take advantage of the higher earnings. A reduction would bring 
borrowers instead. Thus the volume of bank reserves could be 
influenced with some precision. The British economy of the last half 
of the century was exposed by free trade to the competition of the 
rest of the world. One can assume, as a result, that it was fairly sensi- 
tive to higher interest costs which meant higher carrying charges for 
new investment or to lower interest costs which bespoke a favour- 
able opportunity for expansion. There is much room for debate on 
the extent of the effect of the bank rate on the British economy— 
how much investment was encour^ed or discouraged and to what 
extent prices were inflated or deflated. Perhaps the bank rate was 
credited with much that would have happoied anyway. Perhaps it 
derived prestige from its position as a Victorian conversation piece. 
But per^ps it was of consequence. 

Vi^t is not in question is that the possibility of exercising such 
control came to have a compelling charm for ^ who were in any 
way identified with it. This was especially true of the banking com- 




mtuiity. For it meant that bankers, through tke central bank, stood 
at the apex of economic influence. Their power, moreover, was not 
won by the crude, uncouth, and uncertain process of soliciting votes. 
It was die direct reward of financial achievement and wealth. Not 
only did monetary policy belong to the banking community, but 
specific steps were taken to safeguard the exercise of this authority 
from the intervmtion or intercession of politicians. The central bank 
was kept ‘independent’ of the government and in degree above it. 
Such was the case for centuries with the Bank of England. It is still 
so, nominally, of the Federal Reserve System. This independence, 
though extensively celebrated in the conventional wisdom, would 
not long sustain determined opposition to die wishes of the Execu- 
tive and the Congress. But it reflects, in at least vestigial form, the 
belief that monetary policy is the liighly professional prerogative of 
the financial community. As such, it must be protected from the 
crude pressures of democratic government. 

The management of the economy by monetary mediods involved 
the exercise of subde, as distinct from naked, power. No business- 
man, or indeed no citizen, was told what to do. Instead they were 
guided by forces of which they were themselves not wholly aware. 
If the economy must be given guidance, how gratifying that it be 
done in this discreet and seemly way. 

Moreover, to most people money and credit, the way they are 
conceived and extinguished, and die fact that pieces of paper of little 
intrinsic worth can be so valuable, remain a great reservoir of mys- 
tery. Decisions on monetary policy have always been taken in camera 
and communicated to the public only by actions— movements in die 
interest rate or increases or decreases in central bank portfolios. A 
learned literature developed which was privy to the mystery and 
which speculated on the motives behind various moves. Its authors 
came to have a stake in the policy they interpreted. They belonged to 
a select &w who understood. Outshining them, only, were those 
who were privy and really knew. Such was the diarm of diis policy 
that this aflection was easily translated into claims for its efl^veness 
which, in fiict, did invade the supernatural. Monetary policy was 
graced by effects not only mysterious but magical. 

This has not invariably been so. In the nineteen-thirties the prestige 


of monetary' policy was, for a time, very low. High interest rates had 
failed miserably to arrest die speculative boom of the late twenties; 
low rates were equally ineffective in dealing with the Great Depres- 
sion. Bankers, in these years, as a result of error, unhappy accident, 
and the enthusiastic denigration of left-wing critics, had suffered a 
severe decline in popular esteem. Down with them went the faith in 
monetary pohey. Keynes argued that the rate of interest was a round- 
about way of influencing economic activity and of small practical 

From tliis nadir, in the years following World War II monetary 
policy had a great revival. Banks and bankers recovered their pres- 
tige and so did the instrument with which they were so intimately 
identified. Faith in monetary poHcy became a badge of resistance to 
the heresies of Keynes and proof that the individual had no part in die 
radicalism which sought to defiune decent and respectable men be- 
cause they were in the business of holding and lending money. 

More important, somediing liad to be done about inflation. The 
odier measures for contending with this ineluctable phenomenon 
were under the handicap of being unpalatable, impracticable, or un- 
American. Tliis was the practical consequence of their being in con- 
flict with other economic goals. Yet steps had to be taken. Monetary 
policy remained the only hope. To die affection which the policy 
elicited and the faith on which it was grounded was added a large 
element of wishful thinking. There was nothing else, so it had to 
work. Monetary policy became a form of economic escapism. 
Without it the reaUties would indeed be hard. 

Unhappily, fliith or urgent need is not an assurance of practical 
performance. Even if, as bankers have anciendy suspected, doubts 
about monetary policy have on occasion been the invi^ous reflection 
of doubts about bankers, this still does not ensure that monetary 
policy will work. As Chapter II has shown, the ultimate enemy of the 
conventional wisdom is circumstance. It is never in such peril as when 
enthusiastic exponents put it to a practical test. Monetary policy, 
despite its unparalleled position in the conventional wisdom, makes 
only secondary contact with the problem of inflation. And it has had 
the misfortune to be subject to extended experiment. 




Hist of all, monetary policy suffers from the unfortunate absence of 
any occult effect. It has long been clear that economic management, 
especially in the United States, would be greatly ficilitated if resort 
could occasionally be had to witchcraft. Monetary policy, by far die 
most promising possibility, involves none. This every good citizen 
must regret. 

More sombrely, the policy makes no direct contact with the wage- 
price interaction. This not even its prophets suggest. Accordingly, it 
must work, if at all, by reducing the aggregate demand for goods. 
Its handle for accomplishing this is a higlicr interest rate and a 
diminished supply of funds for lending. By thus discouraging lending 
by banks and borrowings by consumers and producers, the policy is 
presumed to restrict or restrain what the latter have to spend. The 
reduction in this spending, if it occurs, will then have secondary (or 
multiplier) effects on the spending of others. Tlic ultimate conse- 
quence is to reduce the demand for goods as a whole or to restrain the 
rate of increase in demand.^ By thus keeping demand from pressing 
on capacity and on the labour force, prices are kept stable. Or such 
must be the hope. 

That is the only avenue of effect.* An alternative form of exposi- 
tion emphasizes the effect of this policy on the supply of money. But 
so far as this argument does not escape into mysticism, it comes to the 
same thing. The money supply increases or decreases as the result of 

* This will serve the same purposes as an absolute reduction if the plant capacity 
and labour force of the economy are also increasii^. It is convenient in any dis- 
cussion to speak in terms of absolute magnitudes— whether an increase in interest 
rates does or does not reduce total spending. But while this is a convenient simpli- 
fication of language, and one that leads to no important error, the question in a 
growing economy will ordinarily be whether the rate of increase in demand is 
reduced relative to the rate of increase in capacity. The difference in these rates will 
be the source of the slack on which price subility depends. 

* Theoretically the rise in the interest rate could encourage consumer saving from 
current income and by the same act reduce spendii^ fi-om current income. The 
possibility of such an effect, though once argued, is no longer seriously urged even 
by the most convinced supporten of monetary policy. 



increases or decreases in commercial bank lending. An increase in the 
money supply aficcts prices by way of the increased spending of 
borrowers from borrowed funds as well as through the multiplier by 
those from whom they buy. When one restricts the money supply, 
one restricts the spending associated with the lending and borrowing 
of funds. The measures arc the same: the supply of funds available for 
lending is reduced, and the interest rate is reduced to discourage 
borrowing. No matter how the cake is shced the policy, if it is to 
work, must restrain borrowing. And tlicrcby it becomes effective by 
reducing or restraining the total volume of spending. So far there is 
little disagreement between economists. 

As just noted, direct spending from borrowed funds is of two kinds 
—by consumers for consumer goods and by businessmen for invest- 
ment. The advantage of looking at economic policy in the full con- 
text of economic attitudes and behaviour will now be evident. To 
restrict consumer borrowing by increasing the interest cost on instal- 
ment and otlicr loans collides abruptly widi die process of consumer 
demand creadon. If consumer wants were independendy determined, 
an increase in interest charges could, conceivably, operate through 
die consumer’s demand schedule to reduce borrowing and spending. 
It seems unlikely diat die elasticity of the response would be great, 
but the possibility exists. But as nutters now stand, any step to dis- 
courage borrowing and buying will be automatically opposed by the 
machinery for consumer demand creation. A shrinkage in consumer 
borrowing will be merely a warning to those concerned with the 
synthesis of consumer demand to increase their efforts. Or they can 
take steps to annul the effect of the increased interest charge. 

This is a matter of minimum difficulty. Consumer credit is ordin- 
arily repaid in instalments, and one of the mathematical tricks of 
this type of repayment is that a very large increase in interest rates 
brings a very small increase in the monthly payment. Thus a man 
who signs a note for $ i,8oo on the purchase of a new car to be repaid 
over twenty-four months, and who agrees to an ‘add-on’ of 6 per 
cent of this amount as interest, will have a total interest bill of $216 
and mondily payments of $84. If the interest charge is increased by 
one-third to an add-on of 8 per cent, his total interest obligation 
becomes $288, but the increase in monthly payments is only $3. The 


one-third increase in interest brings but a one-thirtieth increase in the 
payment.^ This increase can easily be ofBet by a lengthening of the 
term of repayment. In practice it is submerged by a variety of addi- 
tional inspection, insurance, and other charges. Since the customer in 
contemplating the purchases is aware, not of the interest rate, but of 
the monthly charge, it will be seen how readily a very large increase 
in interest charges can, in practice, be offset. During the period of 
active monetary policy in the early fifties, increased finance charges 
were regularly followed by large increases in consumer loans. Want 
creation, and the process of financing it, was still acting to exaggerate 
rather than to restrain the inflationary effect of consumer spending. 

There is no chance that monetary policy can have even a minimal 
effect on consumer spending while its conflict with the machinery 
of consumer want creation remains unresolved and, in degree, even 
unrecognized, and while we concede the paramount importance of 
the latter. And though the reasons have not been fully seen there is, 
in fact, considerable agreement that monetary policy does not make 
any effective contact with consumer borrowing and spending. 


That the restriction of business investment by monetary policy in- 
volves a similar conflict with a prior goal will now be apparent to 
everyone. We set primary store by production. Monetary policy 
seeks to prevent price increases by cutting down on the investment 
by which productive growth is made possible and is sustained. It 
would be hard to imagine a more abrupt collision with the dominant 
position of production. Oddly enough, those who set the greatest 
store by monetary policy— bankers and businessmen— are often those 
who are most inclined to emphasize the importance of production 
and to view increases in output with most satis&ction. 

In practice the conflict between monetary policy and production 
is not so severe. This is partly because of a surviving belief that 
monetary policy somehow makes contact with the price level with- 
out affecting the volume of investment. In the years between 1953 
and 1957 the then Secretary of the Treasury, Mr. George Humphrey, 

^ Consumer Instalment Credit, pt. I, vol. I, pp. 6o-i. 



regularly expressed his conviction that the economy required a high 
and rising volume of business investment and that incentives, includ- 
ing tax revision, were needed to oicourage it. At the same time he 
strongly endorsed a policy of monetary restraint designed to prevent 
inflation. These remarkably contradictory positions can be recon- 
ciled only if there is faith that, by essentially occult means, monetary 
policy will stabilize prices without affecting the volrnne of producer 
borrowing, investment and spending. 

The conflict between production and a monetary poHcy designed 
to decrease business investment is also eased by our tend^cy, des- 
cribed in Chapter IX, to accept and even to applaud whatever rate of 
economic growdi we are currently enjoying. Concern is rhetorical 
radier than real. Hence we are not notably disturbed by a policy 
which, by reducing the volume of new investment, seeks to lower 
the rate of economic growth so long as serious unemployment does 
not appear. 

However, if individual firms were prevented by the policy from 
making the investment which seems to them wise and profitable, 
there would, of course, be objection. And this brings us to the final 
reason why the conflict rarely reaches die acute stage. 


In times of capacity or near-capacity production, the context in which 
inflation becomes a danger and its control indicated, profits and 
profits prospects are certain to be favourable. Because production is 
at or near capacity, investment in expansion will seem to the indi- 
vidual firm both advantageous and singularly logical from the point 
of view of the community. (The firm will be much more impressed 
by the visible service it renders in increasing the supply of its product 
than by die invisible effect of its investment in adding to total spend- 
ing and thus to inflationary pressure.) For all of these reasons most 
investment will be extremely unresponsive to moderate increases in 
die interest rate which is the way in which monetary policy presents 
itself to the ordinary business firm. 

If the policy is applied severely, some firms will be squeezed by the 
higher rates. And in practice, since interest rates arc comparatively 



Sticky, some rationing of credit will occur. Some firms which would 
like to borrow will be unable to do so. If the policy is pressed far 
enough, investment spending will doubtless be curtailed. In the end 
the slack required for price stabiUty would appear. So would the 
conflict with our attitu^ on the importance of production. There 
would be an equally urgent conflict between this poUcy and die 
economic security which is the counterpart of high production. But 
before this point is reached, another problem of even greater import 
arises. That is the ei&ct of monetary pohey on different kinds and 
sizes of firms. 

As we have seen, when demand has been growing and the eco- 
nomy is at or near capacity firms in the oHgopolistic sector are likely 
to have a reserve of unhquidated gains. This enables them to pass 
higher interest charges along to the consumer. (If they can pass along 
wage increases, they can obviously do the same with interest.) And 
by raising prices and income they can resort to unhquidated gains for 
investment purposes. The need to price for returns sufficient to cover 
a considerable share of investment requirements has been a stock 
defence of industrial price increases for many years. Thus industries 
which have luiHquidated gains are able, in effect, to contract out 
firom under the effect of monetary poficy. The attractiveness of the 
large firm as a bank customer and its abflity to go direedy to the 
market for funds also help exempt it fi-om the effects of die pohey. 

Firms in competitive markets— those whose prices and costs are 
impersonally determined by the market for ah— obviously cannot 
pass higher interest costs ahead to the customer. In die relevant short- 
run they cannot raise the prices that they do not control to get invest- 
ment funds firom their customers. As a rule, being small they cannot 
circumvent the rationing of bank credit by selling securities in die 
market. Hence for competitive industries— farmers, smaU builders, 
small retailers, service industries, dealers— monetary pohey is efiec- 
tive. And it will be effective for these firms much before it af&cts the 
industries in which there is a greater measure of market control. 

To recur s^ain to the experience of the fifties, in these years and 
especially in 1955 and 1956 investment by agriculture, residential 
builders, and— although the evidence is less clear— by other small- 


scale industries did decline. At the same time investment by large 
firms, and in producer’s durable goods where the role of the oligo- 
polistic industries is dominant, was rising to record levels. Proof in 
economics is an evasive thing. But we do well to pay attention when- 
ever experience aiErms a theoretical probability. 

It will be easy to see why monetary policy is regarded with equa- 
nimity and even approval by larger and stronger firms. Unless 
applied with severity over time it does not appreciably affect them. 
But for the same reason diere must be grievous doubts about the 
workability of the policy. Before the large volume investment spend- 
ing of the larger and more powerful firms is affected, a severe squeeze 
will ordinarily be placed on the capital requirements of smallcr-scale 
firms. For such firms the conflict between monetary policy and pro- 
ductive growth will be higlily visible and, indeed, very painful. This 
will set severe limits on the rigour with which the policy may be 
pursued. For apart fiom social aspects of a policy which denies 
growth to the numerous and small and favours the large and the 
powerful, farmers and small businessmen are not widiout political 


As noted, the most mercurial source of spending in the economy has 
long been recognized to be tliat for business investment. Spendings 
by consumers and by governments have (consumer borrowing 
apart) substantial elements of reliability. They are related to income 
being received. They are grounded on customary patterns of beha- 
viour. In the case of government outlays they have a marked 
greater constancy than the revenues which support them. Investment 
spending, by contrast, depends on an estimate of future returns. The 
singular feature of the future is that it cannot be known. Estimates 
as to what it holds will change. So accordingly will investment out- 
lays. And the changes in these latter, by changing prospective earn- 
ings, change the futme itself. 

If monetary restraint is exercised over a period of time it may 
eventually affect the investment of larger firms. This may come about 
in a variety of ways but most obviously because the curtailment of 
the borrowing and investment of weaker firms and industries will. 



in the end, affect demand and investment prospects for the more con- 
centrated sector of the economy. When this happens there will be a 
revision of investment plans, and this may be large. 

Monetary policy thus operates on the most mercurial dimension 
of economic activity. This is the final source of inutility and it may, 
indeed, be a source of considerable danger. If, the conflict with pro- 
duction notwithstanding, it is applied with rigour and persistence to 
produce die requisite slack, there is danger that it will do too much. 
Or, to speak more precisely, diere is unavoidable uncertainty as to 
just what it will do. It seeks to influence the most unpredictable 
clement of aggregate demand. The result of this influence is, accord- 
ingly, unpredictable. There must always be danger diat monetary 
policy, if pressed to the point where it will stabilize prices, will 
reduce investment to die point of causing a serious depression. Sudi 
a depression is not uncorrectible. But neither is it desirable. These 
matters are not, unliappily, entirely in the realm of analysis. Tliis 
essay goes to press at a time when monetary policy, having been 
applied for several years without stabilizing prices, shows signs of 
precipitating an adventitiously large reduction in investment. The 
consequences, however temporary, could be unpleasant. 

In the conventional wisdom, the faith in monetary policy is still 
strong. No other economic policy has ever shown such capacity to 
survive failure to be hailed as a success. It will be evident, however, 
that in relation to the problem of inflation— the endemic problem of 
the affluent society— it is dangerous to die degree diat it is effective. 
Those whose love for monetary policy is great may occasionally 
wish to inquire of themselves whether die good name of the econo- 
mic system might not deserve a prior claim to their affections. 



Production versus Price Stability 

In the political spectrum of modem economic policy, monetary 
measures arc die instrument of conservatives. The weapon of liberals 
is fiscal policy. And among economists generally fiscal policy is 
regarded as the ultimate economic weapon. The friends of monetary 
policy aver its effectiveness, perhaps partly to allay their unconscious 
doubts. The effectiveness of fiscal policy is much more rarely debated. 
Moreover, it had the implicit blessing of Keynes. As the converse of 
the pubUc spending wliich was the Keynesian remedy for unemploy- 
ment, it has still a slight cachet of rational radicaUsm. 

Fiscal policy is much simpler and more fordiright in its operation 
than monetary poHcy, The mysticism has been exorcised, and die 
theoretical chain which links the original action and die ultimate 
effect, something always to be watched in economics, is far shorter 
and involves far fewer asseverations as to what should happen. The 
government taxes more than it spends. This difference is not spent. 
Hence it is a net reduction in the spending of the country as a whole. 
If this difference, which in the case of the United States government 
is die surplus in the cash consolidated budget,^ is sufficiently increased, 
then total spending in the economy will no longer press on the capa- 
city of die economy. The now famous slack will result. If this slack is 
large enough, firms will hesitate to raise prices— in terms of the 
present analysis short-run maximization will seem inconsistent with 

^ These budget tables show all receipts as against all expenditures. They diflfer 
from the conventional budget totals, the ones cited in ^ discussion of 

public profligacy, for the latter, as a matter of tradition, exclude some receipts and 
outlays, principally those on social security account. 



longer-run return— and wage demands 'will be resisted. Demand will 
not pull up prices in the competitive sector. Prices as a result will be 
stable unless, indeed, die process is pressed too far, in which case they 

Business finns feel the impact of monetary policy initially in die 
form of a change in factor cost or availability —specifically in the cost 
or availabihty of credit for capital. Large firms and those with sub- 
stantial market power are able, as we have seen, to pass this cost 
increase along to customers, and in case of a shortage of credit they 
can have recourse to another source of supply. Competitive and 
smaller firms have no similar escape. Fiscal policy works, in the 
main, by reducing demand. This reduction affects the demand for the 
products of all firms, large and small, strong and weak. No firm, in 
the technical idiom, can contract out of the movement in its demand 
curve. The effect of the policy will not be precisely the same, as 
between competitive and oligopoUstic markets and as between large 
firms and small, but it is much more nearly cqual.^ 

Yet in the years since World War II in die United States, fiscal 
poUcy has also revealed itself as a very poor defence against inflation. 
The reason was not that it fiiiled to work but that not even its prin- 
cipal proponents argued for its vigorous use. It was favoured in 
principle but not in practice. The explanation is not far to seek. Here 
is another unresolved conflict in economic goals. Once again the 
advantage of seeing things in full social context will be plain. 


For reasons that will be explored in detail in the next chapter, govern- 
ment expenditures are likely at any given time to be near the mini- 
mum which the commimity regards as tolerable. Complaint about 
waste and inefficiency in performing these services, which is endemic 
in our political comment and rarely 'without foundation, should not 
be allowed to confuse the issue. Very important functions can be per- 
formed very wastcfully and often are. And 'waste can rarely be 

^ Where there are unliquiclated gains, prices will fall less promptly and earnings 
will be less prompdy reduced than in a competitive industry where there are no 
such gains. 



eliminated by reducing expenditure. It is far easier to cut the function 
than the waste, and this is what occurs. In time of inflation, the eco- 
nomic context of which we arc speaking, the situation of the public 
services is certain to be even more tenuous because of the inevitable 
tendency for public pay scales and public budgets to lag behind the 
general increase in prices. 

This means that a positive fiscal policy to counter inflation will 
almost always require an increase in taxes. The importance of cutting 
or postponing expenditures, however much it may be urged on the 
more vacuous margins of the conventional wisdom, may on occasion 
sustain hope. But the actual accomplishment will invariably be 
negligible. On this point experience is complete. Whenever inflation 
is a danger (and now and dien when it is not) spokesmen urge the 
Administration and the Congress, and the latter urge upon them- 
selves, sometimes with seeming seriousness, the importance of cutting 
expenditures. Nothing is ever accomplished of sufficient magnitude 
to adect appreciably the total spending of the economy. Quite often 
nothing is accomplished. And indeed the expectations of non-accom- 
plishment are such that the Congressional discussion of budget- 
cutting each winter has now assiuned the innocent aspect of a folk 
rite. It begins as the budget time approaches. It reaches full pitch a 
few days after the budget is submitted. The gods arc appeased by 
stem denunciations of public profligacy and inspired promises of vast 
economies. The ceremony is solemnly described to the people by 
press and radio. Thereafter the seemingly indispensable outlays are 
voted, and the result is more often to increase the budget than to 
reduce it. 

To raise taxes to reduce demand encoimters at the outset a problem 
of tmdentanding. That, in the event of insufficient demand and 
depression, taxes should be cut and public outlays increased in order 
to increase aggregate demand and employment is now widely 
accepted. There is an inherent logic to the procedure. This is also true 
of cutting public expenditures to coimtcr inflation— were this only 
possible. However, the logic of increasing taxes is by no means so 
evident. The first and obvious cfiect is to increase the consumer’s 
livii^ costs or reduce his income. This happens at a time when 
inflation is making it difficult for many people to maintain accus- 


tomed living standards. Odier taxes add to the producer’s costs. Thus 
to attack inflation by raising taxes seems at first glance a curiously 
backhanded procedure. It is strongly resisted by the very consider- 
able number who insist, never without fervour and pride, that 
subtlety in economic rdationships is an indication of error and that 
truth is revealed only to the uncomplicated mind. 


The most serious problem of fiscal policy is the conflict with other 
economic goals. 

It collides, fint of all, with the tacit truce outlined in Chapter VII 
on income inequality. Taxes arc the device by which governments 
have most nakedly sought to influence income distribution. As a 
result, they have a considerable practical and an even deeper sym- 
bolic importance in relation to this issue. Hence a proposal to increase 
taxes for fiscal reasons automatically provokes a debate on the ques- 
tion of ineqtiality. Liberals, who hiiherto had been abiding comfort- 
ably by the terms of the truce, are required by their faith to rally to 
the support of taxes which reduce inequality. Conservatives rally to 
oppose them. In wartime this debate can to some extent be evaded 
by invoking the doctrine of cquahty of sacrifice— the rich man can 
be told that his suflerings at the hands of the tax audiorities are 
roughly the counterpart of those of the soldier imder shellfire. 
Despite much concentrated thought, no entirely suitable reply has 
ever been devised by men of means. Thus in wartime it has been 
practicable to employ the income tax to absorb excess purchasing 
power. In peacetime such use of taxation will at a minimum be 
complicated by a long argument over die essentially unrelated issue 
of equality. 

Finally, there is the now classic conflict with production. Fiscal 
policy becomes eflective only as die reduced demand brings output 
below the current capacity of plant and the labour force. Having 
penuaded ourselves that production is of paramount importance, we 
must now persuade ounelves to sacrifice it in return for price stability. 
Moreover, once again the sacrifice may have to be considerable. 
Where concerns are strongly organized in their markets and deal widi 



Strong unions, i.e. where the likelihood of unliquidated gains is 
great, the slack required, as already noted, may have to be quite 
large. Even though, in £ict, the output is not of high urgency, the 
income to those whom the slack makes imemployed is of impor- 

Unlike monetary policy, fiscal poUcy makes its initial contact with 
the economy not by reducing investment expenditure but by redu- 
cing (in the main) consumer expenditure. In not attacking investment 
it is thus, at first glance, less inimical to economic expansion or 
growth. However, too much should not be made of this distinction. 
Firms are encouraged to invest at least partly because production is 
pressing on capacity. When it ceases to do so— when there is slack— 
they can be expected to cut back on investment. Just as demand will 
have an acceleration effect on investment, to use the term familiar to 
economists, as production approaches capacity and the latter is 
enlarged, so it will have a decelerating effect as production drops 
away from capacity levels. So magnified, the movement in invest- 
ment and therewith in total demand would appear offhand to re- 
inforce the effect of fiscal policy. It gives a leverage to the change in 
spending that is brought about by government action. But it also 
means that once the economy ceases to be at capacity there is a sub- 
stantial sacrifice in investment for growth. Or, to put die matter 
differendy, growth will be at a maximum only when the economic 
system is under that pressure to use capacity which produces infladon. 

Were the economy given to occasional bouts of stimuladon with 
excessive investment and rising prices— the business cycle of the 
central economic tradition— then counter-cyclical repression of de- 
mand might involve no serious problem. Some who have seen no 
conflict between fiscal policy and growth have, without doubt, 
viewed it in such a context. But if full employment and full use of 
capacity is taken as the norm of economic policy, as in modem times 
it is, then the rate of investment associated with full use of capacity is 
also normal. A policy which holds production below capacity in the 
interest of price stability inescapably sacrifices economic growth. 

However, the much more serious conflict is between fiscal policy 
and the unemployment which stability requires in modem markets. 
Insufficient production and growth can be tolerated but this unem- 



ployment cannot be. And to induce it deliberately is a politically 
unalluring policy. In addition, even diough the unemployment 
necessary for price stability is not, as a national total, very great it 
will never be uniformly distributed. Those industries and com- 
munities that are stationary or in which demand is increasing more 
slowly will feel curtailment with especial severity. Here there will be 
pockets of iniemploymcnt and distress. The policy strikes with 
especial force not only on particular people but also on particular 

Conservatives will always prefer inflation to its remedies. And 
faced with a choice between imemploymcnt and price increases the 
liberal poUtician unhesitatingly condemns both. 

The pohtics of an anti-inflationary fiscal poHcy could scarcely be 
less promising. 


Apart firom monetary policy, fiscal poUcy is the only device for 
dealing with inflation that currently has standing in the conventional 
wisdom. But so long as its employment is in unresolved conflict with 
other and prior economic goals it will not be used with eflective 
vigour, at least in peacetime. 

This conflict and the resulting inutflity of fiscal measures are not 
yet widely conceded by economists. The textbooks still elucidate the 
use of fiscal measures as a device for ensuring price stabiUty. They 
concede that we must settle for something less than completely full 
employment and that this will offer difliculties. But they assume that, 
given inflation, taxes can be increased. The only difldculty is that the 
pohey never looks practicable at any particular moment. Unfortun- 
ately, while the conflict with other goals persists, it never will. 

One last possibiUty remains. That is to combine fiscal poUcy with 
control over prices and wages. As a result, prices and wages are im- 
able to respond to the price-increasing influences that develop as 
production approaches capacity. The controls rather than the slack 
serve to prevent price increases at capacity operations. Thus diey 
reconcile capacity output (and also related growth) with price 
stability. It would not be necessary to enforce any substantial amount 
of idle capacity and tmemployment. 



There is a general view dut price and w^e controls accomplidi 
nodiing of themselves— that they deal with symptoms rather than 
with causes. To use them is to juggle with the thermometer, not the 
furnace. If current demand is far in excess of the capacity of the 
economy, there is an important element of truth in this contention. 
The only recourse is to bring demand into balance with supply. 
Anything else is an escape. But if, by fiscal or other measures, the 
aggregate of demand is kept about equal to the currrait capacity of 
the economy, then any such view of wage and price controls is a 
gross oversimplification. Wages act on prices and prices on wages as 
capacity is approached. Controls prevent this interplay. In doing so 
they allow the economy to function closer to capacity without price 

A few economists have conceded this function explicitly;* rather 
more have concurred implicitly by agreeing that such controls are 
necessary in a wartime emergency; i.e. whai there is no escape from 
the need to reconcile full use of capacity with the greatest possible 
degree of price stability. But on few things is the conventional wis- 
dom so certain as the unwisdom of direct controls in peacetime. 
Nothing better establishes the good sense and soundness of an econo- 
mist than a condemnation of such controls. Nothing more quickly 
brings into question his adequacy, even his motives, than the suspicion 
that he is soft on the subject of controls. 

The objections to these controls are numerous, even comprehen- 
sive. To be effective it is assumed that they must apply comprehen- 
sively to all prices and all wages. This means that the administrative 
problems arc indubitably grave and become more serious with 
passage of time. The spectre of such control invokes the ancient 
resistance to the intrusions of government. This intrusion is indeed 
considerable, for the power to set prices is not insignificant in econo- 
mic decision-making. To the extent that Social Darwinists and the 
utilitarian philosophers have successfully identified vitality and liberty 
with the free market, controls will be regarded as an even more fsa- 
reaching menace. 

* Cf. for example Paul A. Samuelson, Economia (ist ed.. New York, McGraw- 
Hill, 1948), p. 435. Samuelson shares the doubts eiq>ressed here about reconcilmg 
this function with the current social ethos. 


Finally, and perhaps most important, such controls are sharply in 
conflict with conventional attitudes toward production. As Chapter 
IX has shown, we set great store by the efficient 'allocation of 
resources as the device for maximizing production. That was the 
relevant instrument in the last century. Social nostalgia still accords 
it a central role. Tliis allocation is accompHshcd in the capitaHst 
society by the market— by the pull and pusli of market prices and 
market wages bringing labour, capital, and materials to the firms and 
industries of most efficient use. Obviously one cannot have both con- 
trols and a free market which performs this function. 

None of this is certain. In the war years controls were consistent 
with a very large increase in output. That was because production 
was expanded along less stylized but far more eflEective dimensions 
than those related to improved resource allocation. Nor is it certain 
that tlie controls wliich would serve to arrest the wage-price spiral 
would have to be comprehensive. It is possible that very limited 
restraints might serve to reconcile capacity output and price stabiUty. 
This is an important point to which this essay will return. However, 
for the moment it is sufficient to note that price and wage control, as 
a way of reconciling price stability, maximum product, and mini- 
mum unemployment, is out of bounds. It too is in conflict, no less 
important if it is ostensible rather than real, with historic attitudes 
toward production.^ 


A word of summary is now in order. We are impelled by present 
attitudes and goals to seek to operate the economy at capacity where, 
we have seen, inflation must be regarded not as an abnormal but as a 
normal prospect. The same attitudes which lead us to set store by 
capacity use of plant and labour force largely deny us the use of 
measures for preventing inflation. Monetary poHcy collides with the 

^ The hold of these ideas is so stroi^ that many would prefer the minor 
effect on output that would come from efficient resource allocation by the 
market in a context of price stability and some unemployment to the much greater 
effect on production which would come from (a) using the unemployed resources 
and (b) ^ving the incentive to increased output which may be expected when 
demand presses on capacity. 




process of consumer demand creation and, since it works on business 
investment, is in conflict with our emphasis on growth. It is also 
ineiFectual, discriminatory and, possibly, dangerous. Fiscal policy is 
sharply at odds with the commitment to a level of output that ensures 
full employment and the accompanying economic security. Direct 
controls, which in dieory might reconcile liigh employment with 
price stability, are under a comprehensive ban. We assume diat we 
must have them in unworkable mass or not at all. They are in osten- 
sible conflict with the goal of efficient production, for that has 
anciently been identified with market allocation of resources. 

These conflicts are partly obscured. The conservative disguises the 
conflict between monetary policy and production by his faidi that 
his policy has occult or other transcendental effects not visible to the 
naked eye. The liberal, including the Keynesian economist, conceals 
the conffict between fiscal pohey and production at full employment 
not so much by resort to mysticism as by a systematic refusal to face 
issues. This he accomplishes by keeping his advocacy of fiscal 
measures in general terms while being specifically critical of unem- 
ployment and under-use of plant. He surrenders the opportunity for 
reconciling die conflict by agreeing that direct controls arc unsound. 

Thus the way is open to recurrent inflation. Tliis, as Chapter XV 
has shown, has a highly discriminatory impact on different groups. 
And we shall sec in die next chapter that dicrc are deeper social con- 
sequences. Inflation strikes the economy at the point where it is most 
vulnerable to damage. We may put it down-after the process of 
consumer demand creation and its financing— as the second of the 
unsolved problems of the aflluent society. 



The Theory of Social Balance 

It is not till it is discovered that high individual incomes will not purchase 
the mass of mankind immunity from cholera, typhus, and ignorance, still 
less secure them the positive advantages of educational opportunity and 
economic security, that slowly and reluctantly, amid prophecies of moral 
degeneration and economic disaster, society begins to make collective 
provision for needs wliich no ordinary individual, even if he works over- 
time all liis life, can provide himself. 


The final problem of the productive society is what it produces. This 
manifests itself in an implacable tendency to provide an opulent 
supply of some things and a niggardly yield of others. This disparity 
carries to the point where it is a cause of social discomfort and social 
unhcalth. The line which divides our area of wealth from our area of 
poverty is roughly that which divides privately produced and mar- 
keted goods and services from publicly rendered services. Our wealth 
in the first is not only in startling contrast with the meagreness of the 
latter, but our wealth in privately produced goods is, to a marked 
degree, the cause of crisis in the supply of public services. For we have 
failed to see die importance, indeed the urgent need, of maintaining 
a balance between the two. 

This disparity between our flow of private and public goods and 
services is no matter of subjective judgment. On the contrary, it is the 
source of the most extensive comment which only stops short of the 
direct contrast being made here. In the years following World 
War II, the papers of any major city— those of New York were an 
^ Equality (4th revised ed.), pp. 134-5. 




excelleiit example— told daily of the shortages and shortcomings in 
the elementary municipal and metropolitan services. The schools 
were old and overcrowded. The police force was under strength and 
underpaid. The parks and playgrounds were insufficient. Streets and 
empty lots were filthy, and the sanitation staff was imderequipped 
and in need of men. Access to the dty by those who work there was 
uncertain and painful and becoming more so. Internal transportation 
was overcrowded, unhealthful, and dirty. So was die air. Parking on 
the streets had to be prohibited, and there was no space elsewhere. 
These deficiencies were not in new and novel services but in old and 
established ones. Cities have long swept their streets, helped their 
people move around, educated them, kept order, and provided horse 
rails for vehicles which sought to pause. That dieir residents should 
have a non-toxic supply of air suggests no revolutionary dalliance 
with socialism. 

The discussion of this public poverty competed, on the whole 
successfully, with the stories of ever-increasing opulence in privately 
produced goods. The Gross National Product was rising. So were 
retail sales. So was personal income. Labour productivity had also 
advanced. The cars that could not be parked were being produced at 
an expanded rate. The children, though without schools, subject in 
the playgrounds to the affectionate interest of adults with odd tastes, 
and disposed to increasingly imaginative forms of delinquency, were 
admirably equipped with television sets. We had difficulty finding 
storage space for the great surpluses of food despite a national dis- 
position to obesity. Food was grown and packaged under private 
auspices. The care and refreshment of the mind, in contrast with the 
stomach, was principally in the public domain. Our colleges and 
universities were severely overcrowded and imderprovidcd, and the 
same was true of the mental hospitals. 

The contrast was and remains evident not alone to those who read. 
The family which takes its mauve and cerise, air-conditioned, power- 
steered, and power-braked car out for a tour passes through cities 
that are badly paved, made hideous by Utter, blighted buildings, bill- 
boards, and posts for wires that should long since have been put 
underground. They pass on into a countryside tiiat has been rendered 
largely invisible by commercial art. (The goods which die latter 



advertise have an absolute priority in our value system. Such aesthetic 
considerations as a view of the countryside accordingly come second. 
On such matters we are consistent.) They picnic on exquisitely pack- 
aged food from a portable icebox by a polluted stream and go on to 
spend the night at a park which is a menace to pubUc health and 
morals. Just before do2dng off on an air-mattress, beneath a nylon 
tent, amid the stench of decaying refuse, they may reflect vaguely on 
the curious unevenness of their blessings. Is this, indeed, the American 


In the production of goods within the private economy it has long 
been recognized that a tolerably close relationship must be main- 
tained between the production of various kinds of products. The out- 
put of steel and oil and machine tools is related to the production of 
cars. Investment in transportation must keep abreast of the output of 
goods to be transported. The supply of power must be abreast of the 
growth of industries requiring it. The existence of these relationships 
— coeflScients to the economist— has made possible the construction 
of the input-output table which shows how changes in the produc- 
tion in one industry will increase or diminish the demands on other 
industries. To this table, and more especially to its ingenious author, 
Professor Wassily Leontief, die world is indebted for one of its most 
important of modem insights into economic relationships. If expan- 
sion in one part of the economy were not matched by the requisite 
expansion in other parts— were the need for balance not respected- 
then botdenecks and shortages, speculative hoarding of scarce sup- 
pUcs, and sharply increasing costs would ensue. Fortunately in peace- 
time the market system operates easily and eflfectively to maintain 
this balance, and diis together with die existence of stocks and some 
flexibility in the coefficients as a result of substitution, ensures that no 
serious difficulties will arise. We are reminded of the existence of the 
problem only by noticing how serious it is for those coimtries— 
Poland or, in a somewhat different form, India— which sedc to solve 
the problem by planned measures and with a much smaller supply of 

Just as there must be balance in what a community produces, so 



there must also be balance in what the community consumes. An 
increase in the use of one product creates, ineluctably, a requirement 
for others. If we are to consume more can, we must have more 
petrol. There must be more insurance as well as more space on which 
to operate them. Beyond a certain point more and better food appean 
to mean increased need for medical services. This is die certain result 
of the increased consumption of tobacco and alcohol. More vacations 
require more hotels and more fishing-rods. And so forth. With rare 
excepdons— shortages of doctors are an exception which suggests the 
rule— this balance is also maintained quite effortlessly so far as goods 
for private sale and consumption arc concerned. The price system 
plus a rounded condition of opulence is again the agency. 

However, the relationships we arc here discussing are not confined 
to the private economy. They operate comprehensively over the 
whole span of private and public services. As surely as an increase in 
the output of cars puts new demands on the steel industry so, also, it 
places new demands on public services. Similarly, every increase in 
the consumption of private goods will normally mean some facili- 
tating or protective step by die state. In all cases if these services are 
not forthcoming, the consequences will be in some degree ill. It will 
be convenient to have a term which suggests a satisfactory relation- 
ship between the supply of privately produced goods and services 
and those of the state, and we may call it social balance. 

The problem of social balance is ubiquitous, and frequendy it is 
obtrusive. As noted, an increase in the consumption of cars requires 
a facihtating supply of streets, highways, traffic control, and parking 
space. The protective services of the police and the highway patrols 
must also be available, as must those of the hospitals. Although the 
need for balance here is extraordinarily clear, our use of privately 
produced vehicles has, on occasion, got &r out of line with the supply 
of the related public services. The result has been hideous road con- 
gestion, an annual massacre of impressive proportions, and chronic 
colitis in the cities. As on the ground, so also in the air. Planes collide 
with disquieting consequences for those within when the public pro- 
vision for air traffic control htils to keep pace with private use of the 

But the car and the aeroplane, versus the space to use them, are 


merely an exceptionally visible example of a requiremoit that is per- 
vasive. The more goods people procure, the more packages they 
discard and the more trash that must be carried away. If the appro- 
priate sanitation services are not provided, the counterpart of in- 
creasing opulence will be deepening filth. The greater the wealth the 
thicker vrill be the dirt. This indubitably describes a tendency of our 
time. As more goods are produced and owned, the greater are the 
opportunities for fiaud and the more property that must be pro- 
tected. If the provision of public law enforcement services do not 
keep pace, the counterpart of increased well-being will, we may be 
certain, be increased crime. 

The city of Los Angeles, in modem times, is a near-classic study in 
the problem of social balance. Magnificently efficient factories and 
oil refineries, a lavish supply of cars, a vast consumption of hand- 
somely packaged products, coupled vrith the absence of a municipal 
trash collection service which forced the use of home incinerators, 
made the air nearly imbreathable for an appreciable part of each 
year. Air pollution could be controlled only by a complex and highly 
developed set of public services— by better knowl^ge stemming 
fi:om more research, better policing, a municipal trash collection ser- 
vice, and possibly the assertion of the priority of clean air over the 
production of goods. These were long in coming. The agony of a 
city without useable air was the result. 

The issue of social balance can be identified in many other current 
problems. Thus an aspect of increasing private production is the 
appearance of an extraordinary number of things which lay claim to 
the interest of the yoimg. Motion pictures, television, cars, and the 
vast opportimities which go with ffie mobility, together with such 
less enchanting merchandise as narcotics, comic books, and pomo- 
graphia, are all included in an advancing gross national product. The 
child of a less opulent as well as a technologically more primitive 
had far fewer such diversions. The red schoolhouse is remembered 
mainly because it had a paramount position in the lives of those who 
attended it that no mod!^ school can hope to attain. 

In a well-run and well-regulated community, with a sound school 
system, good recreational opportunities, and a good police force— in 
short a community where public services have kept pace with private 



production— the diversionary forces operating on the modan juven- 
ile may do no great damage. Television and the violent mores of 
Hollywood and Madison Avenue must contend with the intellectual 
discipline of the school The social, adiletic, dramatic, and like attrac- 
tions of the school also claim the attention of the child. These, 
together with the odier recreational opportunities of the community, 
minimize the tendaicy to delinquency. Experiments with violence 
and immorality are checked by an effective law enforcement system 
before diey become epidemic. 

In a community where public services have &iled to keep abreast 
of private consumption things are very different. Here, in an atmo- 
sphere of private opulence and public squalor, the private goods have 
full sway. Schools do not compete with television and the movies. 
The dubious heroes of the latter, not Miss Jones, become die idols of 
the young. The hot-rod and the wild ride take the place of more 
sedentary sports for which there are inadequate ficilities or provision. 
Comic books, alcohol, narcotics, and switchblade knives are, as 
noted, part of the increased flow of goods, and there is nothing to 
dispute their enjoyment. There is an ample supply of private wealth 
to be appropriated and not much to be feared flrom the police. An 
austere community is ffee from temptation. It can be austere in its 
public services. Not so a rich one. 

Moreover, in a society which sets large store by production, and 
which has highly efiective machinery for synthesizing private wants, 
there are strong pressures to have as many wage-earners in the family 
as possible. As always all social behaviour is part of a piece. If both 
parents are engaged in private production, the burden on the public 
services is furdier increased. Children, in effect, become the charge 
of the community for an appreciable part of the time. If the services 
of the community do not keep pace, this will be another source of 

Residential housing also illustrates tlie problem of tiie social 
balance, althot^ in a somewhat complex form. Few would wish to 
contend diat, in the lower or even the middle income brackets, 
Americans are munificently supplied with housing. A great many 
families would like better located, or merely more, house-room, and 
no advertising is necessary to persuade them of their wish. And the 


provision of housing is in the private domain. At first glance at least, 
the line we draw between private and public seems not to be pre- 
venting a satisfactory allocation of resources to housing. 

On closer examination, however, the problem turns out to be not 
greatly different from that of education. It is improbable that the 
housing industry is greatly more incompetent or inefficient in the 
United States than in those coimtries— Scandinavia, Holland, or (for 
die most part) England— where slums have been largely eliminated 
and where minimum standards of cleanliness and comfort are well 
above our own. As die experience of these countries shows, and as 
we have also been learning, the housing industry functions well only 
in combination widi a large, complex, and cosdy array of public 
services. These include land purchase and clearance for redevelop- 
ment; good neiglibourhood and city planning, and cfiective and 
well-enforced zoning; a variety of financing and odier aids to the 
house builder and owner; publicly supported research and architec- 
tural services for an industry whidi, by its nature, is equipped to do 
little on its own; and a considerable amount of direct or assisted 
public construction for families in die lowest income brackets. The 
quality of the housing depends not on the industry, which is given, 
but on what is invested in tiiesc supplements and supports. 


The case for social balance has, so far, been put n^atively. Failure to 
keep public services in minimal relation to private production and 
use of goods is a cause of social disorder or impairs economic per- 
formance. The matter may now be put affirmativdy. By failing to 
exploit the opportunity to expand public production we are missing 
opportunities for enjoyment which otherwise we might have had. 
Presumably a community can be as well rewarded by buying better 
schools or better parks as by buying bigger cars. By concentrating on 
the latter rather than the former it is filing to maximize its satis- 
factions. As with scliools in the community, so with public services 
over the country at large. It is scarcely sensible that we should satisfy 
our wants in private goods with reiMess abimdance, while in the 
case of public goods, on the evidence of the eye, we practise extreme 



sel£<ienial. So, far from systematically exploiting the opportunities 
to derive use and pleasure from these services, we do not supply what 
would keep us out of trouble. 

The conventional wisdom holds that the community, large or 
small, makes a decision as to how much it will devote to its public 
services. This decision is arrived at by democratic process. Subject to 
the imperfections and imcertaintics of democracy, people decide how 
much of their private income and goods they will surrender in order 
to have public services of which they are in greater need. Thus there 
is a balance, however rough, in the enjoyments to be had from 
private goods and services and those rendered by public authority. 

It will be obvious, however, that this view depends on the notion 
of independently determined consumer wants. In such a world one 
could with some reason defend the doctrine that the consumer, as a 
voter, makes an independent choice between public and private 
goods. But given the dependence effect— given that consumer wants 
arc created by the process by whidi they are satisfied— the consumer 
makes no su^ choice. He is subject to the forces of advertising and 
emulation by which production creates its own demand. Advertising 
operates exclusively, and emulation mainly, on behalf of privately 
produced goods and services.^ Since management and emulative 
efiects operate on behalf of private production, public services will 
have an inherent tendency to lag behind. Car demand which is expen- 
sively synthesized will inevitably have a much larger claim on income 
than parks or public health or even roads where no such influence 
operates. The engines of mass communication, in dieir highest state 
of development, assail the eyes and ears of the community on behalf 
of more beer but not of more schools. Even in the conventional 
wisdom it will scarcely be contoided that this leads to an equal choice 
between the two. 

The competition is especially unequal for new products and ser- 
vices. Every comer of the public psy^e is canvassed by some of die 

^ Emulation does operate between communities. A new school or a new high- 
way in one community does exert pressure on others to remain abreast. However, 
as compared with the pervasive effects of emulation in extending the demand for 
privatdy produced consumer's goods there will be agreement, I think, that this 
intercommunity efiect is probably small. 


nation’s most talented citizens to see if the desire for some merchant- 
able product can be cultivated. No similar process operates on behalf 
of the non-merchantable services of the state. Indeed, while we take 
die cultivation of new private wants for granted we would be 
measurably shocked to see it applied to public services. The scientist 
or engineer or advertising man who devotes himself to developii^ 
a new carburettor, cleanser, or depilatory for which the pubUc 
recognizes no need and will feel none until an advertising campaign 
arouses it, is one of the valued members of our society. A politician 
or a public servant who dreams up a new public service is a wastrel. 
Few public offences are more reprehensible. 

So much for the influences which operate on die decision between 
public and private production. The calm decision between public and 
private consumption pictured by the conventional wisdom is, in fact, 
a remarkable example of the error which arises from viewing social 
behaviour out of context. The inherent tendaicy will always be for 
pubhc services to fall behind private production. We have here the 
first of the causes of social imbalance. 


Social balance is also die victim of two further features of our 
society— the truce on inequality and the tendency to inflation. Since 
these are now part of our context, their effect comes quickly into 

With rare exceptions such as the post office, public services do not 
cany a price ticket to be paid for by the individual user. By their 
nature they must, ordinarily, be available to alL As a result, when 
they are improved or new services are initiated, there is the ancient 
and troublesome question of who is to pay. This, in turn, provokes 
to life the collateral but inelevant debate over inequality. As with the 
use of taxation as an instrument of fiscal policy, the truce on in- 
equality is broken. Liberals are obliged to argue that the services be 
paid for by progressive taxation which will reduce inequahty. Com- 
mitted as they are to the urgency of goods (and also, as we shall see 
in a later chapter, to a somewhat mechanical view of the way in 
which the level of output can be kept most secure) they must oppose 



sales and excise taxes. Conservatives rally to the defence of inequality 
—although without evex quite committing themselves in such tm- 
couth terms— and oppose the use of income taxes. They, in effect, 
oppose the expenditure not on the merits of the service but on the 
demerits of the tax system. Since the debate over inequality cannot 
be resolved, the money is frequently not appropriated and the service 
not performed. It is a casualty of the economic goals of both hberals 
and conservatives for both of whom die questions of social balance 
are subordinate to those of produedon and, when it is evoked, of 

In practice matters are better as well as worse than diis statement of 
the basic forces suggests. Given the tax structure, die revenues of the 
levels of government grow with the growth of die economy. Ser- 
vices can be maintained and sometimes even improved out of this 
automatic accretion. 

However, this effect is highly unequal. Hie revenues of the federal 
government, because of its heavy reliance on income taxes, increase 
more than proportionately with private economic growth. In addi- 
tion, although the conventional wisdom greatly deplores the fact, 
federal appropriations have only an indirect bearing on taxation. 
Pubhc services are considered and voted on in accordance widi their 
seeming urgency. Initiation or improvement of a particular service is 
rarely, except for purposes of oratory, set against die specific effect on 
taxes. Tax poHcy, in turn, is decided on the basis of the level of eco- 
nomic activity, the resulting revenues, expediency, and odier con- 
siderations. Among these the total of the thousands of individually 
considered appropriations is but one fector. In this process the ulti- 
mate tax consequence of any individual appropriation is de minimis, 
and the tendency to ignore it reflects the simple mathematics of 
the situation. Thus it is possible for the Congress to make decisions 
affecting the social balance without invoking the question of in- 

Things are made worse, however, by die fact that a large propor- 
tion of the federal revenues are pre-empted by defence. The increase 
in defbice costs has also tended to absorb a large share of the normal 
increase in tax revenues. The position of the federal government for 
improving the social balance has also been weakened since World 



War II by the strong, although receding, conviction that its taxes 
were at artificial wartime levels and that a tacit commitment exists to 
reduce taxes at the earliest opportunity. 

In the states and localities the problem of social balance is much 
more severe. Here tax revenues— this is especially true of the General 
Property Tax— increase less than proportionately with increased 
private production. Budgeting too is far more closely circumscribed 
than in the case of the federal government— only the monetary 
authority enjoys die pleasant privilege of underwriting its own loans. 
Because of this, increased services for states and localities regularly 
pose the question of more revenues and more taxes. And here, with 
great regularity, the question of social balance is lost in the debate 
over equality and social equity. 

Thus we currently find by far the most serious social imbalance in 
the services performed by local governments. The F.B.I. comes much 
more easily by funds dian the city poUce force. The Department of 
Agriculture can more easily keep its pest control abreast of expanding 
agricultural output tiian the average city health service can keep up 
with die needs of an expanding industrial population. One conse- 
quence is that the federal government remains under constant pres- 
sure to use its superior revenue position to help redress the balance 
at the lower levels of government. 


Finally, social imbalance is the natural ofl^pring of persistent infla- 
tion. Inflation by its nature strikes different individuals and groups 
with highly discriminatory effect. The most nearly unrelieved vic- 
tims, apart firom those living on pensions or other fixed provision for 
personal security, are those who work for the state. In the private 
economy the firm which sells goods has, in general, an immediate 
accommodation to the inflationary movement. Its price increases are 
the inflation. The incomes of its owners and proprietors are auto- 
matically accommodated to the upward movement. To the extent 
that wage increases are part of the inflationary process, this is also true 
of organized industrial workers. Even unoi^anized white-collar 
workers are in a milieu where prices and incomes are moving up. 



The adaptation of their incomes, if less rapid than that of the in- 
dustrial workers, is still reasonably prompt. 

The position of the public employee is at the other extreme. His 
pay scales are highly formalized, and traditionally they have been 
subject to revision only at lengthy intervals. In states and localities 
inflation docs not automatically bring added revenues to pay higher 
salaries and incomes. Pay revision for all public workers is subject to 
the temptation to wait and see if the inflation isn’t coming to an end. 
There will be some fear— this seems to have been more of a factor in 
England dian in the United States— that advances in public wages 
will set a bad example for private employers and imions. 

Inflation means that employment is pressing on the labour supply 
and that private wage and salary incomes are rising. Thus the oppor- 
tunities for moving from public to private employment are especially 
&vourable. Public employment, moreover, once had as a principal 
attraction a high measure of social security. Industrial workers were 
subject to the formidable threat of imemployment during depression. 
Public employees were comparatively secure, and this security was 
worth an adverse salary differential. But with improving economic 
security in general this advantage has diminished. Private employ- 
ment thus has come to provide better protection against inflation and 
litde worse protection against other hazards. Though the dedicated 
may stay in public posts, the alert go. 

The deterioration of the public services in the years of inflation has 
not gone unremarked. However, there has been a strong tendency to 
regard it as an adventitious misfortune— something which, like a 
nasty shower at a picnic, happened to blight a generally good time. 
Salaries were allowed to lag, which was a pity. This is a very inade- 
quate view. Discrimination against the public services is an organic 
feature of inflation. Nothing so weakens government as persistent 
inflation. The public administration of France for many years, of 
Italy until recent times, and of other European and numerous South 
American countries have been deeply sapped and eroded by the 
e&cts of long-continued inflation. Social imbalance reflects itself in 
inability to enforce laws, including significantly those which protect 
and advance basic social justice, and in failure to maintain and im- 
prove essential services. One outgrowth of the resulting imbalance 


has been frustration and pervasive discontent. Over much of the 
world there is a rough and not entirely accidental correlation between 
the strength of indigenous communist parties or the frequency of 
revolutions and the persistence of inflation. 


A feature of die years immediately following World War 11 was a 
remarkable attack on the notion of expanding and improving public 
services. During die depression years such services had been elabor- 
ated and improved partly in order to fill some small part of the 
vacuum left by the shrinkage of private production. During the war 
years the role of government was vasdy expanded. After that came 
the reaction. Much of it, unquestionably, was motivated by a desire 
to rehabilitate die prestige of private production and therewith of 
producers. No doubt some who joined the attack hoped, at least 
tacidy, that it might be possible to sidestep the truce on taxation 
vis-a-vis equality by having less taxation of all kinds. For a time the 
notion that our pubUc services had somehow become inflated and 
excessive was all but axiomatic. Even Uberal politicians did not 
seriously protest. They found it necessary to aver that they were in 
favour of public economy too. 

In this discussion a certain mystique was attributed to the satis- 
faction of privately supplied wants. A community decision to have 
a new school means that the individual surrenders the necessary 
amount, willy-nilly, in his taxes. But if he is left with that income, 
he is a free man. He can decide between a better car or a television 
set. This was advanced with some solemnity as an argument for the 
TV set. The difficulty is that this argument leaves the community 
with no way of preferring the school All private wants, where the 
individual can choose, are inherendy superior to all public desires 
which must be paid for by taxation and with an inevitable com- 
ponent of compulsion. 

The cost of public services was also held to be a desolatii^ burden 
on private production, although this was at a time when the private 
production was bui^eoning. Urgent warnings were issued of the 
unfavourable effects of taxation on investment— T don’t know of a 



surer way of killing off die incentive to invest than by imposing taxes 
wliich are regarded by people as punitive,’* This was at a time when 
the inflationary effect of a very high level of investment was causing 
concern. The same individuals who were warning about die inimical 
effects of taxes were strongly advocating a monetary policy designed 
to reduce investment. However, an imderstanding of our economic 
discourse requires an appreciation of one of its basic rules: men of 
high position are allowed, by a special act of grace, to accommodate 
their reasoning to the answer they need. Logic is only required in 
those of lesser rank. 

Finally it was argued, with no litde vigour, that expanding govern- 
ment posed a grave threat to individual liberties. ‘Where distinction 
and rank is achieved almost exclusively by becoming a civil servant 
of the state ... it is too much to expect diat many will long prefer 
freedom to security.’* 

With time this attack on public services has somewhat subsided. 
The disorder associated with social imbalance has become visible 
even if the need for balance between private and public services is 
still imperfectly appreciated. 

Freedom also seemed to be surviving. Perhaps it was realized that 
all organized activity requires concessions by the individual to the 
group. This is true of the policeman who joins the police force, tlie 
teacher who gets a job at the high school, and die executive who 
makes his way up the hierarchy of Du Pont. If there are differ- 
ences between public and private organization, they arc of kind 
rather than of degree. As this is written the pendulum has in fret 
swung back. Our liberties are now menaced by the conformity 
exacted by the large corporation and its impulse to create, for its 
swn purposes, the oi^anization man. This danger we may also 

None the less, the post-war onslaught on the public services left a 
lasting imprint. To suggest that we canvass our public wants to see 
where happiness can be improved by more and better services has a 

* Arthur F. Bums, Chairman of the President’s Council of Economic Advisen, 
U.S. News & World Report, May 6, 1955. 

* F. A. Hayek, The J^ad to Serfdom (London, George Roudedge Be Sons, 1944), 
p. 98. 



sharply radical tone. Even public services to avoid disorder must be 
defended. By contrast the man who devises a nostrum for a non- 
existent need and then successfully promotes both remains one of 
nature’s noblemen. 


The Investment Balance 

Social balance relates to the goods and services we consume. There 
is an allied problem in the way we commit the resources that are 
available for investment in the economy. The same forces which 
bring us our plenitude of private goods and leave us poverty- 
stricken in our public services also act to distort the distribution of 
investment as between ordinary material capital and what we may 
denote as the personal capital of the country. This distortion has far- 
reaching effects. One of them is to impair tlic production of private 
goods themselves. The situation will be seen in sharpest focus if we 
pursue the latter point. It is not, however, the only or, indeed, the 
most important consequence. 

Economic growth—the expansion of economic output— requires 
an increase in the quantity of tlie productive plant and equipment of 
the country or in its quaUty or, as in the usual case, in both. This is 
fully agreed. The increase in quantity is capital formation. The in- 
crease in quality is what we call technological advance. 

In the earhest stages of economic development, from which so 
many of our economic attitudes are derived, the simple and sufficient 
way of getting more growth was to have more saving and therefore 
more material capital. Entrepreneurial talent was needed but, at least 
in western countries, it was almost invariably, if not invariably, 
forthcoming. To perform this function required some education. 
But, as the example of any number of great entrepreneurs from 
Commodore Vanderbilt to Henry Ford made clear, the education 
could be exiguous and often was. The existence of an educated and 
literate body of workers was desirable but by no means essential. 




Some of the greatest industrial enterprises in the United States in the 
past were manned prindpally by men who could speak no English. 
Most important of all, in all the earlier stages of development there 
was no dose and predictable correlation between the supply of edu- 
cated men and the nature of their training and the rate of techno- 
logical innovation. Inventions were more often the result of brilliant 
flashes of insight than the product of long-prepared training and 
development. The Industrial Revolution in England was ushered in 
by the invention of the flying shuttle by John Kay, the spinning jenny 
by James Hargreaves, the spinning frame (presumptively) by Richard 
Arkwright and, of coune, by James Watt’s steam engine. These 
represented vast improvements in the capital which was being put to 
industrial use. But only in the case of Watt could the innovation be 
related to previous education and preparation. Kay and Hargreaves 
were simple weavers with a mechanical turn of mind. Arkwright had 
been apprenticed as a boy as a barber and a wigmaker and was barely 

However, with the development of a great and complex industrial 
plant, and even more with the development of a great and sophisti- 
cated body of basic science and of experience in its appbeation, all 
this has been changed. In addition to the entrepreneurs (and perhaps 
one sliould add the accountants and clerks) who were more or less 
automatically forthcoming, modem economic activity now requires 
a great number of trained and qualified people. Investment in human 
beings is, prima facie, as important as investment in material capital. 
The one, in its modem complexity, depends on the other. 

What is more important, the improvement in capital— technological 
advance— is now almost wholly dependent on investment in educa- 
tion, training, and sdmtific opportunity for individuals. One branch 
of the conventional wisdom clings nostalgically to the conviction 
that brilliant, isolated, and intuitive inventions are still a principal 
instmment of technological progress and can occur anywhere and to 
anyone.^ Benjamin Franklin is the sacred archetype of the American 
genius and nothing may be done to disturb his position. But in the 
unromantic fact, iimovation has become a highly organized enter- 

* Cf. for example the article by G. Warren Nutter, ‘Monopoly, Bigness and 
Progress’, in Journal (fPoUlkal Economy, December 1956. 



prise. The extent of the result is predictably related to the quality and 
quantity of the resources being applied to it. These resources are men 
and women. Their quahty and quantity depend on the extent of die 
investment in their education, training, and opportunity. They are 
the source of technological change. Without them investment in 
material capital will still bring growth, but it will be die inefficient 
growth that is combined with technological stagnation. 


We come now to the nub of the problem. Investment in material 
capital is distributed to the various claimant industries by the market. 
If earnings are liigh (at the margin) in the oil industry and low in the 
textile business, it is to the oil industry dut capital will flow. This 
allocation by the market works, it would appear, with tolerable 
efficiency. Among the recognized crimes of economics, any interfer- 
ence with the ‘free flow’ of capital has a very high standing. 

But while this flow operates as between different material claim- 
ants on investment funds, it operates only widi manifest imcertainty 
and inefficiency as between material and personal capital. Nearly all 
of the investment in individuab is in the pubUc domain. And vir- 
tually all of it is outside the market system. It is the state which, 
through primary and secondary schools, and through the colleges 
and universities, makes the largest investment in individuals. And 
where, as in the case of private colleges and universities, the state is 
not direedy involved, the amount of the investment is not direedy 
related to the eventual pay-out in production. Investment in refin- 
eries being higher than in textile mills, the refineries will draw 
investment funds. But engineers to design the refineries may be even 
more important— in effect yield a higher return. And the highest 
return of all may come from the scientist who makes a marked 
improvement in the refining process. These are not imaginative 
possibilities but common probabilities. Yet the high return to scien- 
tific and technical training does not cause the funds to move from 
material capital to such investment. There is no likely flow from the 
building of the refineries to the education of the scientists. Here, at 
the most critical point in the vaunted process of investment resource 



allocation, is an impediment of towering importance. Character- 
istically, however, it has received Utde comment. It is not, like the 
tariSf or monopoly, one of the classic barriers to capital movement. 
Hence it did not get a foothold in economics in die last century and, 
accordingly, under the intellectual grand&ther clause which has such 
sway in the science it has no real standing now. 

There can be no question of the importance of the impediment. 
Investment in individuals is in the public domain; this investment has 
become increasingly essential with the advance of science and tech- 
nology; and there is no machinery for automatically allocating 
resources as between material and human investment. But this is not 
all. As we have seen in earlier chapters, there is active discrimination 
s^ainst the investment in the public domain and hence in any part of 
it. The investment in the refinery is an unmitigated good. It adds to 
our stock of wealth. It is a categorical achievement. But the training 
of the scientists and engineers who will run the refinery, improve its 
economic efficiency, and possibly in the end replace it with some- 
thing better is not a categorical good. The money so invested is not 
regarded with approAral. On the contrary, it is widely regarded as a 
burden. Many will judge the magnitude of the achievement in this 
area by the smallness of the investment. Others will hold this invest- 
ment in abeyance while arguit^ the ancient issue of equality. So 
incredible is the provision for such investment that a considerable 
part will have to be begged. Even the prestige of the word invest- 
ment itself is not regularly accorded to these outlays. A century ago, 
when educational outlays wore not intimately related to production, 
men sensibly confined the word investment to the increases in capital 
whidi brought a later increase in product. Education vm a consumer 
outlay. The popular us^e has never been revised.^ 

Could it be legally arranged that youngsten were sorted out at an 
early age, possibly by their test score in mathematics, and the prom- 
ising then be indentured for life to a particular corporation, the flow 
of investment into human development might soon be placed on a 

1 Since this was written and under the impact of Soviet scientific achievements 
there has been considerable discussion of our lag in investment in scientific educa- 
tion. However, this is being treated as a kind of aberration, and not as a fiinda- 
mental flaw in our machinery of resource allocation. 



rough parity with that into material capital. Firms would perceive 
the need for investing in their scientific and engineering stock much 
as major league baseball clubs have learned the wisdom of investing 
in their farm teams. Under ideal arrangements any surplus talent 
could be marketed. The cost of unsuccessfully trying to educate die 
inevitable errors of selection would be cither written off or partially 
retrieved by using the individuals as salesmen. Under such a system, 
which as noted would unfortunately involve the elimination of the 
liberty of the individuals in question, it is fairly certain that invest- 
ment in human beings would rise and at a rapid rate. 

But so long as fi:ee choice remains, such investment must remain 
largely a pubUc function. The individual, since he is only at the 
beginning of earning power, cannot himself make any appreciable 
part of the investment. Whether his parents can and will be wiUing 
to do so is a highly accidental matter. His future employer can hardly 
be expected to invest in an asset that may materialize in the plant of 
a competitor or another industry. At most he wiU, as now, distribute 
scholarships and fellowships in the hope of ultimately influencing the 
choice of those in whom the investm^t is nearly complete. This has 
no appreciable effect on the total of the investment in people. It is a 
scalping operation. It does, however, suggest the store which is set 
by die resulting assets. 


Human development, in other words, is what economists have long 
termed an external economy. Its benefits accrue to all firms; it is not 
suffidendy specific to any one to be bought and paid for by it. 

What is true of human development is also true of one ofitsprin- 
dpal finits. That is sdentific research. A sodety which sets for itself 
the goal of increasing its supply of goods vtill tend, inevitably, to 
identify all innovation with additions to, changes in, or increases in 
its stock of goods. It wiU assume, accordingly, that most research 
will be induced and rewarded by the market. 

Much will be. Under the proper circumstances— firms must be of 
adequate size in the industry, and certain other conditions must be 
med— we may expect our economy to do a superior job of invent- 
^ Cf. American Capitalism, pp. 84-94 (sod ed.). 



iiig, developing, and redesigning consumers’ goods and improving 
tlicir process of manufacture. Nor is there reason to doubt that similar 
attention will be given, under equally favourable circumstances, to 
the capital goods industries which support this consumers’ goods 
consumption. Much of this achievement will impress us only so long 
as we do not inquire how die demand for die products so developed 
is contrived and sustained. If we do we arc bound to observe that 
mudi of the researdi effort— as in the car industry— is devoted to 
discovering changes that can be advertised. The research programme 
will be built around the need to devise ‘selling points’ and ‘adver- 
tising pegs’ or to accelerate ‘plaimcd obsolescence’. All diis suggests 
that the incentive will be to allocate research resources to what, in 
some sense, arc die least important things. The quantity is more 
impressive than the way it is allocated. Still one would not wisli to 
suggest that the American economy is delinquent in the attention it 
devotes to diange and improvement in consumers’ goods. Clearly 
it is not. 

These incentives, however, operate over but a small part of total 
sdentific and research activity and, indeed, over but a small part that 
is potentially applicable to the production of goods. Thus a very 
large amount of highly useful research cannot be spedalized to or be 
sustained by any marketable product. This is most obviously true of 
much so-called basic research. But it is also true of a large amount of 
applied edbrt. The modem air transport is die stepchild of the mili- 
tary aeroplane. It would never have sustained the underlying research 
and development mdeavour on its own. The same is true in even 
greater degree of the non-military uses of nudear energy. There are 
numerous other cases. 

It is because military considerations have induced a large allocation 
of resources to research that this problem is, on the whole, less 
striking than that of investment in penonal resources. Although the 
research must be in the public domain, military uigency has helped 
to ofiset this blight. There is litde comfort for man in the cntcum- 
stances which have induced this allocation of resources or £com the 
resulting weapons. But it has catalysed a great deal of important 
sdentific innovation and devdopment. Far more significant research 
lies behind the edhrt to exceed the speed of sound than lies behind 



even the best new soap. It may well be more signiheant for industry 
itself. In any event the rate of technical progress in American industry 
in recent decades would have been markedly slower had it not been 
for militarily inspired and for this reason publicly supported research. 


As noted, one must where possible deal with the conventional 
wisdom on its own terms. The conventional wisdom stresses the 
paramount urgency of increased production of goods. To show that 
even for this purpose its allocation of investment is irrational— that 
it is tolerable for research only as a by-product of military claims and 
that for investment in individuals it can make no claim at all to 
rationality— is impressive. However, it would be barbarous to sug- 
gest that the only claim to be made on behalf of education is the 
increased production of goods. It has its independent and, one must 
suppose, its higher justification. A horse almost certainly appreciates 
a comfortable stable, a secure supply of oats, a measure of recreation, 
and conceivably the pleasure of being esteemed at least as highly as 
any other horse in the stable. The non-theological quality which 
most distinguishes men firom hones is the desire, in addition to these 
attributes of material and psychic well-being, to know, undentand, 
and reason. One may hope that investment in the things that difi^- 
entiate man firom his animals requires no further justification. If, 
however, this investment is less than would be justified even for the 
production of goods, one wonden how very much less than the 
ideal it must be for the purposes of human satisfaction and fulfilment. 


A final and rather more speculative issue remains, which is the joint 
legacy of the problem of social balance in consumption and of 
balanced investment in material and personal capital 
As Chapter XIV has argued, the process by which wants are now 
synthesized is a potential source of economic instability. Production 
and therewith employment and social security are dependent on an 
inherently unstable process of consumer debt creation. This may one 



day fiilter. And a decay in emulative compulsions or in the ability to 
synthesize demand could bring a fall in consumption, an increase in 
unemployment, and a difficult problem of readjustment. 

However great or small these dangers, they will be lessened if our 
consumption is widely distributed— if productive energies serve uni- 
formly the whole span of man’s wants. Since public wants are not 
contrived, they are not subject to a failure of contrivance. Since they 
are not sold on the instalment plan, they are not subject to curtail- 
ment by any of the factors which may make people unwilling or 
unable to incur debt. Thus the better the social balance the more 
immune the economy to fluctuations in private demand. 

One is tempted to press the matter further. Simple minds, pre- 
sumably, are the easiest to manage. Better education, one product of 
improved social balance, might well be expected to lessen die effec- 
tiveness of synthesis and emulation in the manufacture of new wants. 
At first glance, therefore, it could be regarded as inimical to the 
process by which demand is now sustained. But there can also be 
Htde doubt that education has a marked influence in widening the 
span of the individual’s wants. Synthesis and emulation are most per- 
suasive in creating desire for simple physical objects of consumption 
or simple modes of enjoyment which require no previous condition- 
ing of the consumer. Houses, can, the imcomplicated forms of alco- 
hol, food, and sex; sports; and movies require litde prior preparation 
of the subject for die highest enjoyment. A mass appeal is thus 
successful, and hence it is on these things that we find concentrated 
die main weight of modem want creation. By contrast, more esoteric 
desires— music and fine arts, literary and scientific interests, and to 
some extent travel— can normally be synthesized, if at all, only on 
the basis of a good deal of prior education. Thus the effect of educa- 
tion and pro tanto of social balance is to increase the range of wants to 
be satisfied and to lessm the dependence on those which must be 
contrived. Or, more accurately, diis is a plausible hypothesis. For so 
stem have been the forces channelling our thoughts in the past that 
there is litde to go on in these fertile valleys of the imagination. 



The Transition 

In one sense the main task of this essay has been accomplished. Its 
concern has been with the tliraldom of a myth— the myth that pro- 
duction, by its overpowering importance and its ineluctable diffi- 
culty, is the central problem of our lives. We have now seen the 
sources of this myth. And we have seen some of the consequences— 
the tenuous and maybe dangerous process of consumer demand 
creation, recurrent inflation, social imbalance— to which the myth 
commits us. Emancipation of the mind is a no less worthy enterprise 
than emancipation of the body. The bondsman, given his freedom 
and persuaded of its virtues, is ordinarily left to enjoy it. Nor is his 
emancipator blamed for failing to give him a list of things to do. 

And a concern for new goals, once the old ones become suspect, 
is not only the next order of philosophical business but the inevitable 
one. Social philosophy, far more than nature, abhors a vacuum. Men 
must sec a purpose in their efforts. This purpose can be nonsensical 
and, as we have seen, if it is elaborately nonsensical that is all to the 
good. Men can labour to make sense out of single steps toward the 
goal without ever pausing to reflect that the goal itself is ludicrous. 
But they must not question the goal. For to do so is to initiate a 
search for one that serves better. Thus it is that an essay such as this is 
far more important for what it destroys— or to speak more accur- 
ately, for the destruction whidi it crystallizes, since the ultimate 
enemy of mydi is circumstance— than for what it creates. 

This is sharply at odds with the conventional wisdom. The latter 
sets great store by what it calls constructive criticism. And it reserves 
its scorn for what it is likely to term a purely destructive or negative 




position. In this, as so often, it manifests a sound instinct for self- 
preservation.^ The attack on the conventional or accepted thought 
is dismissed as an inferior and, indeed, a wanton activity and, as such, 
not something that should be taken seriously. At the same time ‘con- 
structive alternatives’ are invited. These are a much lower order of 
danger. The threat to the conventional wisdom is always its own 
irrelevance, not the appeal of a relevant alternative. In post-war West 
Germany, in contrast with the Weimar regime, governments have 
displayed notable stability of tenure. Considerable credit goes to the 
constitutional provision for the so-called ‘constructive veto*. This, 
in effect, requires the parliament to decide on a new administration 
before it votes out the old one. To settle in advance on such an 
alternative is difficult or impossible. Thus parliaments have had no 
choice but to maintain the status quo. The conventional wisdom 
fmds similar strength in asserting the moral superiority of construc- 
tive criticism. 

However, as always, it is sound strategy to deal with the conven- 
tional wisdom on its own terms. If it inquires how we escape the 
present preoccupation with production; or how we escape the race 
to manufacture more wants for more goods and dien yet more 
wants for yet more goods; or what is to fill the seemingly vast 
vacuum which abandoning diis race would leave in our lives; or 
what are to be the symbols of happiness if goods cease to be so 
regarded, then it is well that there be answers. The defences of the 
conventional wisdom are formidable. One should not concede it any 
points. What replaces die profound preoccupation with production? 


In the world of minor lunacy the behaviour of bodi die utterly 
rational and the totally insane seems equally odd. The notion that 

^ The same instinct has caused the conventional wisdom to turn vigorously on 
the debunkcr of public reputations. Obviously the man who, because of psycho- 
logical, commercial, or other motivation, concerns himself with trying to separate 
truth from fiction in assessing human accomplishments is a grave threat to the man 
of conventional wisdom. This threat has been greatly abated in modem times by 
reducing die debunkcr, even when he is unqualifiedly concerned with the truth, 
to the level of a literary pariah. 



ours, inevitably, is a world of deep poverty in which production is 
of supreme urgency is an old one. So is the corresponding behaviour. 
The discovery that production is no longer of such urgency— that it 
is something of which we are reasonably assured and which, para- 
doxically, is most threatened by our failure to see it in proper per- 
spective*— involves a major wrench in our attitudes. What was 
soimd economic behavioiur before cannot be sound economic be- 
haviour now. What were die goals of individuals, organizations and, 
perhaps more especially, of government before may not be so now. 
Many who will find it possible to believe that production has lost its 
pristine urgency will still find the changes in behaviour and poHcy 
that this suggests rather difficult to swallow. This bdiaviour and 
these policies will have an air of fecklessness, even of danger. And 
this, needless to say, will be exploited vigorously by the conventional 

It was ever so. In the depression years many could agree that the 
clear and immediate cause of difficulty was a shortage of demand for 
goods. That the private economy might find its equilibrium not with 
a demand sufficient to ensure full employment but at a level where 
substantial millions were left unemployed seemed plausible enough. 
Yet, having conceded all this, it was still not easy to agree that the 
government should supplement the deficient private demand by 
public borrowing and spending. This seemed vastly reckless. The 
Keynesian diagnosis was one thing, but the Keynesian remedy was 

Again in die thirties the diminishing urgency of the problem of 
production began to manifest itself in increasing surpluses of agri- 
cultural products. For a time it was possible, and not witliout reason, 
to attribute these surpluses to the Great Depression. But in the fordes 
it became clear that increasing productivity in agriculture was out- 
distancing constuner needs even when demand was at full employ- 
ment levels. It was clearly greater than the farm industry’s capacity 
for adjustment. Many came to accept this diagnosis in one form or 
another. But two of the more obvious remedies— to control produc- 

* Committing us, to repeat, to the tenuous process of private want creation, 
causing social imbalance, contributing to economic instability, and threatening, 
among other things, the supply of trained manpower. 



tion or to give away the surplus to people who could eat it— con- 
tinued to be regarded with horror. In the early years of die New Deal 
the slaughter of Utde pigs, a primitive form of production control, 
created a mild form of poUtical trauma. Ever after, statesmen advo- 
cated control, though it was an obvious and indeed inescapable 
remedy, only after much hesitation and many elaborate manifesta- 
tions of dismay designed to appease the gods and placate the con- 
ventional wisdom. Wherever possible euphemisms were employed 
—as diis is written, instead of taking acres out of production they are 
being put into a soil bank. 

Similarly, when the other obvious remedy, that of giving away 
food, was first broached it was soundly denounced. To wish to give 
milk to Hottentots became, for a time, a symbol of advanced 
economic irresponsibUity. Ultimately die necessities of the case tri- 
umphed. Under the guidance of an impeccably conservative Secre- 
tary of Agriculture, Mr. Ezra Taft Benson, world-wide gifts of food 
in large quantity became an established poUcy. If the Hottentots have 
not yet acquired dried skim milk, it is only because they have not 
sufiiciendy pressed their request. But again elaborate disguise was 
essential The receiving coimtrics ‘bought’ the products with their 
own currency, which meant that they suppled money that cost them 
nothing and which the United States agreed not to use in appreciable 
amount. Men would rarely have been poor in this world had they 
been able to satisfy their desires by purchases made with money of 
dieir own manufacture and which their well-supplied vendors agreed 
to accept without question. 

life and certainly the language would be simpler were we to 
accept change, and the consequent poUcies, at thdr face value. But it 
would also destroy an engaging, almost Oriental quality of our 
political life which leads us to drape the urgencies of the present in 
the symbols of the past. Though production has receded in impor- 
tance, we shall doubtless continue to pretend that it isn’t so. 


For the number of questions which we agree to resolve in accordance 
with whether production is aided or retarded— made more or less 



important— is enormous. If something seems to contribute to in- 
creased production, it is good. If it fails to do so, it is useless. If it 
damages production, it is evil. If it can be shown that a tax is dama- 
ging to incentives and thus to production, it is per se a bad tax; and 
even if this result cannot be shown, it is still wordi alleging. Our 
oldest and in some ways our most beloved topic of controversy is the 
tariff. Its enemies have always argued that the industries it nurtures 
are inefEcient— diat resources would be used more efficiendy else- 
where. They have never doubted that efficiency was the decisive 
consideration. And dieir opponents, while challenging the defence 
of the higher efficiency of free trade in various ways, never chal- 
lenged that criterion as such. 

Similarly, the debate over the large corporation has been con- 
cerned almost exclusively with its efficiency. Its defenders have justi- 
fied it by its competence as a producer. Its critics wondered if it 
might have exceeded the optimally efficient size. The corporation is 
a creature of no small cultural and political importance. Until very 
recently diesc aspects of its existence have been uniformly dismissed 
as of small accoimt. As with the corporation so with die trade union. 
It is defended or condemned in accordance with its effect on the pro- 
ductivity of its members. That it has made work more tolerable; has 
enhanced the dignity of its memben; and through seniority rules 
accorded its members what seem to be the natural rights of advan- 
cing age are not decisive. The decisive thing is the effect these have 
had on productivity. 

If a locahty is declining— if power, transportation, raw-material 
supplies, consumer taste, or the tax laws have given other areas or 
countries an advantage— then one should encourage the people to 
leave. MobiHty means efficiency. It is true that the ties of family, 
friends, pastor and priest, countryside and mere inertia may make 
this a Draconian and even cruel prescription. But it is the efficient 
course. Until relatively recent times a large amoimt of industrial and 
occupational disease could be justified on the grounds diat considera- 
tions of cost did not permit of its elimination. Such a contention is no 
longer acceptable in the conventional wisdom. The latter would not 
hesitate, however, to point out that the concessions won over the 
years by the coal-miners has speeded the relative decline of this 



industry. Given the importance of production, this was most 

But if the things produced are not of great urgency, it follows that 
the efficiency of the process by wliich they are produced ceases to be 
an overriding consideration. New and usually much more difficult 
tests must be applied. It is not unlikely, indeed, that tliesc will already 
be found playing a considerable but surreptitious role and this now 
becomes obtrusive. 

Thus the .argument over the progressive income tax has long been 
concerned witli its effect on efficiency. Some have argued that it 
impairs incentives to increased efficiency. Odiers have argued that it 
does not. But if efficiency is not decisive, then tlic debate must go 
forward on other grounds. These may well include tlie simple and 
imcouth question of who is to pay how much. However, it is witli 
this question that many who now talk about efficiency arc really 

Moreover, if efficiency is no longer a prime criterion, tariff policy 
will have to be resolved on die basis of how far we should go in 
making trade die handmaidoi of larger national policy or what part 
compassion should play in easing die problems of distressed indus- 
tries or areas. But, in fact, trade policy is already partly subordinate 
to both international comity and local charity. Efficiency has already 
partly surrendered to these other and more urgent considerations. 

If the modem corporation must manufacture not only goods but 
the desire for the goods it manufactures, the efficiency of the first part 
of this activity ceases to be decisive. One could indeed argue that 
human happiness would be as effectively advanced by inefficiency in 
want creation as efficiency in production. Under these circumstances, 
the relation of the modem corporation to the people who comprise 
it— their chance for dignity, individuality, and full development of 
penonality— may be at least as important as its efficiency. These may 
be wortii having even at higher cost of production. Evidently the 
unions, in seeking to make life tolerable on the job, were being 
governed by a sound instinct. Why should life be intolerable to make 
things of small urgency? 

Attitudes toward ffie declining community may need to be 
revised. The happiness and contentment of the people of Lawrence 



and Lowell and thdr preference, remarkable as it may seem, for life 
in these ancient towns, now becomes a consideration to set against 
the effi cienc y with which they are employed. The rational and com- 
passionate society may seek to avoid the heartbreaks of an industrial 
Diaspora. If die goods have ceased to be urgent, can we sternly com- 
mand men to leave their homes to produce them with maximum 

Coal has mmierous substitutes. The marginal urgency of its pre- 
sent employments is low. The workers who made their Ufe more 
hvable at the expense of the most efficient production of coal may 
well have had reason on their side. In any case the substitutes— oil, 
water power, and atomic energy— are cleaner and more pleasant to 
work with. 

The Benthamite test of public policy was ‘what serves the greatest 
happiness of the greatest number*, and happiness was more or less 
imphddy identihed with productivity. This is still the official test. 
In modem times the test has not been very rigorously apphed. We 
have sensed though we have not recognized the dechning impor- 
tance of goods. Yet even in its deteriorated form we cling to this 
criterion. It is so much simpler than to substitute the other tests— 
compassion, individual happiness and well-being, the minimization 
of community or other social tensions— which now become relevant. 


Much more than decisions on economic policy are involved. A sys- 
tem of morality is at stake. For what we regard as the Puritan inheri- 
tance was soundly grounded on economic circumstance. In a country 
that was being carved from the wilderness, thrift and labour were the 
obhgations of everyone, for they conserved and enlarged the supply 
of goods which sustained life itself. And the central or classical 
tradition of economics was more than an analysis of economic 
behaviour and a set of rules for economic polity. It also had a moral 
code. The world owed no man a living. Unless he worked he did 
not eat. The obligation thus imposed required him to labour on his 
own behalf and therewith on behalf of others. Failure to work, even 
when it could be afforded, was offensive to what came to be 



called the Victorian, but could as well have been named the 
economic, morality. ‘To live in idleness, even if you have the means, 
is not only injurious to yourself, but a species of hraud upon the 

But if the goods have ceased to be urgent, where is the fraud? Can 
the North Dakota farmer be indicted for failure to labour hard and 
long to produce the wheat that his government wishes passionately 
it did not have to buy? Are we desperately dependent on the dili- 
gence of the worker who applies maroon and pink enamel to the 
functioidess bulge of a modem motor-car? The idle man may still be 
an enemy of himself. But it is hard to say that the loss of his effort is 
da m a g in g to society. Yet it is such damage which causes us to con- 
demn idleness. 

Again, the fict that a man was damaging society by his failure to 
produce has been, in the last analysis, the basis for a fair amount of 
highly convenient indifference and evm cruelty in our behaviour. 
The churches have long featured the virtue of loving one’s neigh- 
bom. But the practical churchman has also recognized the need to 
reconcile this with basic economic necessities. A good deal of prac- 
tical heartlessness was what served the social good. Many people have 
always found it painful to work. To show them compassion might 
be to damage production. The heartbreaks of migration in pursuit of 
jobs mig^t be considerable, but how much worse the inefficiency of 
producing in the wrong place. No tears should be wasted on the 
farmers who go bankrupt. This is the path to more efficient farm 
production. In the Unit^ States, as in otho: western countries, we 
have for long had a respected secular priesthood whose function it 
has been to rise above questions of religious ethics, kindness, and 
compassion and show how these might have to be sacrificed on the 
altar of the larger good. That larger good, invariably, was more 
efficient production. The sacrifice obviously loses some of its point 
if it is on behalf of the more efficient production of goods for the 
sadsfection of wants of which people are not yet aware. It is even 
more tenuous, in its philosophical foundations, if it is to permit the 

I William A. Alcott (a New Ingiand moralist and schoolmaster of the last 
century) quoted by Irving G. WylDe in The Self-Made Man in America (New 
Brunsvnek, Rutgers University Press, 1954), p. 41. 



more efficient contriving of wants of which people are not aware. 
And this latter is no insignificant industry in our time. 

At this point even the most calloused of readers will regard with 
sympathy the tragic impUcations for estabUshed ideas which the 
rejection of scarcity and the acceptance of affluence involve. The 
almost incredibly elaborate efforts of the conventional economic 
wisdom to protect the present myth become imderstandable. One 
has a sense of disloyalty, almost of treachery, in destroying it. 

Yet the escape from the diraldom of productive efficiency and 
unremitting labour is not without its opportunities. However, one 
final bridge must be built between the world of scarcity and that of 
affluence. For in the world of scarcity the need for goods was, as just 
noticed, powerfully reinforced by the compulsion to work. The 
individual who did not work, unless rarely favoured by circum- 
stance, was penalized by a total loss of income. That penalty still 
widely persists even though it now enforces the production of rela- 
tively unimportant goods. And the need to provide jobs requires us 
to face the unhappy choice either of having the economy constantly 
under inflationary strain or consigning some part of the working 
force to joblessness and inferior income. Obviously we shall not reap 
the rewards of affluence until we solve this problem. 



The Divorce of Production from Security 

We have seen that while our productive energies are used to make 
things of no great urgency— things for which demand must be syn- 
thesized at elaborate cost or they might not be wanted at all— the 
process of production continues to be of nearly undiminished ur- 
gency as a source of income. The income men derive from producing 
things of slight consequence is of great consequence. The production 
reflects the low marginal utility of the goods to society. The income 
reflects the high total utility of a livelihood to a person. For this 
reason, although there is conventional effort to deny it, income and 
employment rather than the goods have become our basic economic 
concern. This is revealed in the almost uncontrollable tendency to 
diink of depressions not in terms of lost output but in terms of unem- 
ployment and of the equally powerful tendency to identify good 
times with full employment rather than with high production. 

Moreover, the urgency of offering employment to all who seek it 
is probably increasing. This is a not unnatural consequence of 
affluence. When the income of the employed worker is high, it is not 
easy to defend a situation in which a small minority of workers have 
no employment income at all. Such discrimination seems altogether 
too flagrant. With increasing opulence we are thus more firmly com- 
mitted to finding jobs for everyone. Our situation is that of a factory 
which must be operated at top speed for three shifts and seven days a 
week even at some risk of eventual breakdown, not because the 
product is in demand— on the contrary, much ingenuity is required 
to dear the shipping platform— but because any lower rate of opera- 
tion will leave some of the people in town without a livdihood. If 




that misfortune is the alternative, then the factory may have to be so 
operated. But the question of freeing the community from such 
dangerous dependence will unquestionably arise. 

In the real world, apart from the danger of breakdown,^ there is 
also the problem of inflation. So long as we arc committed by the 
imperatives of employment and income to operate at the capacity of 
plant and labour force, we shall have the threat of rising prices. 
Persistent inflation is not a happy prospect. It is also the long-run 
enemy of social balance. 

The solution, or at least one part of it, is to have a reasonably 
satisfactory substitute for production as a source of income. This and 
this alone would break the present nexus between production and 
income and enable us to take a more relaxed and rational view of 
output without subjecting individual members of the society to 


An obvious device for breaking the nexus between production and 
income security is at hand— that is the system of unemployment 
compensation. It provides income apart from production. To serve, 
however, it must be cast in a new and radically different role. In the 
past, imemployment compensation has served two principal pur- 
poses. It has eased the hardship of the worker who was making a 
routine change of jobs such as might be the result of a declining 
demand for one product and an increasing demand for another. And 
it has protected the worker from short-run changes in the level of 
i^gregate demand which, on occasion, reduced the requirement for 
workers below the presently available labour force. Unemploymoit 
compoisation did not protect him from a continuing frilure to em- 
ploy die full labour force, for the duration of the payments was 
striedy limited and useful though they mig^t be as a stop-gap they 
were far from being a substitute for wage income. In 1956 payments 
in difrerent states averaged from $18 to $36 weekly. In the same year 
average wages in manufretuting establishments were just under 
$80 weekly. 

^ See pp. 158 f£ 


The meagreness of the payments is related to attitudes toward 
production. If production is all-important, then there should be no 
source of income that is a dose substitute. People should be required 
to work and produce— or else. And in fict nothing has so haunted 
the discussion of sodal seciuity legislation as the spectre of the 
worker who lives amiably off his unemployment compensation 
pay and contributes nothing to sodety in return. So payments have 
been kept at levels relevant to survival rather than to comfort. And 
although the most painful prospect facing die worker under modem 
capitalism is not the short-term unemployment that is ensured but the 
unemployment assodated with depression and continuing defidency 
in demand— the kind of imemployment that was experienced by so 
many through the decade of the thirties— this greater risk has re- 
mained essentially uncovered. Sads&ctoiy insurance against such 
long-term unemployment would also provide the opportunity for 
long-term malingering. The lazy worker needed to be faced with the 
fact that sooner or later his eligibility would be exhausted and he 
would have to find a job. And to be satisfactory, the bmefits would 
have to be lai^er. 

Were unemployment compensation to approach the level of the 
weddy wage, we should in fket be prepared for some increase in 
deliberate idleness— in malingering as a way of life. So loi^ as pro- 
duction was accorded priority, any increase in voluntary idleness was 
pro (onto intolerable sdihough, in keeping with the refined illogic 
with which the conventional wisdom regarded production, involun- 
tary imemployment in depression, and the consequent loss of output, 
was never especially reprehensible. But in a world where production 
is no longer urgent we can obviously view an increase in volimtary 
idleness with some equanimity. Yet even if the unemployment 
compensation were dose to the ws^e, it is not certain thatihe malin- 
gering would be great. Fean in diis matter have always been extra- 
ordinarily exaggerated. In the thirties it was widdy assumed that 
unemploymoit compensation, even as a badly paid alternative to 
toil, woidd be seized upon by a large number of people. In fact, the 
proportion of the active labour force exercising ^ option has 
always been negligible. The aversion to idleness is remarkably strong 
both in those who view with misgivings those who work and in 



those who work. The tendency to think of idleness as ‘a species of 
&aud upon the community* is not peculiar to the upper income 
classes. One problem in winning a measure of release from our 
present commitment to full employment is the stigma which for a 
long time will continue to attach to any kind of unemployment. It 
will continue to be disreputable. 

If unemployment is a disaster for individuak, we have no dioice 
but always to produce at or near the capacity of the labour force. 
The continuing result will be the tcmsions and the dangers associated 
with the need to frbricate demand for increasingly unimportant 
goods and the persistent inflation which follows from the instability 
of the economy at full employment. To many even the escape or 
partial escape from these troubles will not seem to justify a reduction 
in the incentive to work or a possible subsidy to idleness. Even wifli 
the support of logic and necessity one can go only so far in breaking 
the icons. 

However, there are ways of avoiding any important eflect on 
incentives. At the same time the system can be so designed as to keep 
it from adding to inflation and to make it an important and even 
vital reinforcement to other fiscal policy as a protection against 
depression. Since depressions remain a major threat to economic 
security this latter is a consideration of central importance. 


If the level of unemployment compensation is very close to the em- 
ployed wage, this will be a cause of upward pressure on wages as the 
economy approaches full employment. If unemployment is a finan- 
cially attractive alternative to employment, the bargaining position, 
both of individual workers and of unions, will be increased. And if 
some workers must be bid out of well-compensated unemployment 
by employers, this will add to the upward pressure on ws^es. We 
have seen that as capacity of plant and laboiu: force are approached, 
there are now strong forces causing wages to act on prices and prices 
on wages. The eflect of unemployment compensation that is dose to 
die weddy wage would add to inflationary pressures. It would make 


unemploymeat tolerable, but it would make the approach to full 
employment even more inflationary than now. 

But at full employment the level of unemployment compaisadon 
need not be high. At this point comparatively little hardship is 
caused if it is low in comparison with the employed wage. Workers 
are not relying on such compensation to tide them over long-term 
unemployment, for there is none. The traditional purpose of such 
compensation, as noted, is to hdp die individual during routine job 
transfers. When employment is high and job opportunities are 
numerous, these transfers will be quickly made. An alternative to 
relying on unemployment compensation is at hand. That is to find a 
job. One reason for die large gap that appeared between the level of 
imemployment compensation and the level of w^es in the years 
following World War II was that these were years of virtually full 
employment. As a result the level of compensation, for the great 
majority of workers, was a matter of small consequence and secon- 
dary political interest. 

When there is some general unemployment— when die economy 
is not operating at the full capacity of the labour force— conditions 
are almost exacdy reversed. Then opportunities are few; die time in 
transition between jobs will be greater; there is now no certain 
escape feom unemployment into a job. The chance for re-employ- 
ment does not depend on the individual’s own edbrts. Such efforts 
will be unavailing as long as there is an insufficiency in aggregate 
demand. It is on this that the unemployment depends. This being so, 
high compensation rates do not interfere with re-employment. And 
since the capacity of the economy and the labour force are not being 
fully used, high compensation rates do not add to inflationary pres- 
sures. They do add to income and consumer demand. This they do 
automatically. As a man loses his wage he gains alternative income 
of the same order of magnitude. Thus such payments act far more 
effixrtively than any deliberate fiscal policy— spending on public 
enterprises, for example— to arrest defiation and enhance macro- 
economic security. 

The dear answer, therefore, is that unemployment compensation 
should be increased as unemployment increases and should be dimi- 
nished as full employment is approached. It will be convenient to 



have a name for such a system, and we may call it Cyclically Gradu- 
ated Compensation^ or more conveniently by the initials C.G.C. It 
would not be difficult to design, and it represents an essential advance 
over the present static system. Indeed it is hard to think of a sii^le 
measure of economic reform that would have more satisfactory 
ef&ct. Apart from breaking the connection between output and 
economic security, of the importance of which more will be said 
presently, it would largely eliminate the hazard of depression tmem- 
ployment for the worker. By stabilizing demand it would go far to 
mitigate the threat of depression. At the same time there would be no 
addition to the inflationary pressures at full employment and no 
interference, at such times, with the search for jobs. To the extent 
that malingering is mduced by high rates of unemployment compen- 
sation diis problem disappears. When jobs are plentiful, there would 
be no incentive to such idleness, for compensation would be rela- 
tively low. When jobs are unavailable, no useful distinction can be 
made between those who are voluntarily and those who are involun- 
tarily unemployed. Neither can find work. 


The administration of the present system of tmemployment compen- 
sation by the individual states, together with its commitment to the 
principle of insiurance and reserves and die use of merit ratings, has 
made it notably inflexible. Changes in the level and duration of 
compensation come slowly as the result of action by the indiAndual 
state legislatures. To get C.G.C. by state action would be quite 

Fortunately this is not necessary or desirable. The present system, 
administered by the states and with the present diflferentiak between 
states, should continue to provide the basic payment.* C.G.C. should 
be a purely federal enterprise. Economic policy relating to the level 

* The tefisrence to the business qrde here is not to the andent rhythmic move* 
ment but rather to chai^ in the level of demand and employment of whatever 
nature and however induced. 

* However, more satis&ctory federal standards would be required. They are 
needed in any case. 


of economic output is now a recognized federal responsibility. The 
federal government is accountable. Pro tauto, the unemployment 
associated with changes in output is a federal responsibihty. Since 
such unemployment has no conceivable actuarial aspect, it should 
be a current budgetary charge. When seasonally adjusted unemploy- 
ment remains above tlie level which represents the amount neces- 
sarily associated witli full employment for a specified period of time, 
the federal supplement would become payable. This would take die 
form of a specified fraction of the difference between die worker’s 
weekly earnings over a period in his last employment and his entitle- 
ment under estabHshed unemployment compensation. By way of 
illustration, if it is assumed that 2 million is die maximum amoimt 
of unemployment associated widi full employment— i.e., die maxi- 
mum amount attributable to seasonal idleness, those engaged in 
changing jobs and the others for whom unemployment is a short- 
term affair— C.G.C. would be paid in the amount of, say, half 
the difference between standard unemployment compensation and the 
individual’s last wage. When unemployment passed 3 million, the 
C.G.C. payment would rise to two-thirds and perhaps at 4 million 
to a top of four-fifths of the difference. At this point the worker who 
earned the average 1956 weekly wage of $80, and who was entitled 
to a regular (and comparatively generous) payment in that year of 
$36, would have a total weekly income of $71.20. Of this $35.20 
would be fi:om C.G.C. (The surviving difference represents the con- 
tinuing concession to the Puritan principle that leisure should be less 
amply rewarded than work.) Moreover although under C.G.C. the 
unemployment and the employed wage can come very close to- 
gether, and this is a central virtue of the device, the di^rential in 
favour of the employed wage cannot be entirely eliminated. The 
normal, if surprising preference of people for work ought, no doubt, 
to be reinforced by a pecuniary incentive so that if a job is available 
a man can be depended upon to take it. 

The present limitation on the number of weeks for which com- 
pensation may be paid is based on the belief that the individual can, 
given time and effort, find a new job. This is true of short-term 
unemployment-rthe unemployment that is incidental to changing 
demand for workers under conditions of full employment and ample 

234 the affluent society 

job opportunities. It is not the case of unemployment which is caused 
by shifts in the level of output that are beyond the power of the 
individual worker, by his own effort, to correct. Therefore the worker 
should be entitled to compensation for this type of unemployment 
for as long as it lasts. In other words, as long as unemploymoit 
continues above die speciffed levels, the total of die C.G.C. and 
the regular payments should continue. The extra cost, beyond 
the normal period of eligibility, is also logically a federal responsi- 

'Vl^cn aggregate demand in the economy foils below the level that 
employs the entire labour force, the resulting unemployment does 
not distribute itself uniformly across the country. Depending on 
their industries some areas and communides are seriously affected; 
in odiers the impact is slight. To the worker who lives in a town 
where 50 per cent of the working force is unemployed, it is not 
entirely reassuring to know that over die country as a whole the 
average tmemployment is comparatively low. The question will 
arise as to whether C.G.C. might have a regional or local adjustment 
Might it not be declared in effect in an area or community of high 
unemployment even though the national unemployment is below 
the minimum? And might it not be suspended in areas where unem- 
ployment is low even though total unemployment is above the 
minimum? The advantage of cautious steps in this direction will be 
evident. It would make C.G.C. more effective in die areas afflicted 
by unemployment; it would minimize its competition with jobs 
in those areas that are not. The danger is that it will interfere with 
inter-regional migration in search of employment. But this, we 
have seen, is no longer subject to die imperatives of a poor society. 
A system of regional or local adjustments would be a logical 

There will be objection that once the rates are advanced to the 
levd associated widi a higher volume of unemployment, the pres- 
sure of unions and voters generally will be :^;ainst dieir reduction 
even as unemployment declines. This may be so. It is unhappily 
impossible in a democratic society to think of a single measure for the 
improvement of social well-being which is not subject to subversion 
by ill-concdved minority or even majority pressures. The post 


office, not precisely a novelty among institutions of civilized govern- 
ment, continues to be subject to the eilbrts of citizens to have it carry 
their mail if not for nothing at least for a minor fraction of the cost. 
But the principles of C.G.C. arc well within the range of popular 
understanding whidi is rarely as low as ordinarily assumed. Com- 
pensation can be high when unemployment is substantial only be- 
cause it is low when unemployment is low. Then it does not keep 
people from taking jobs. Nor does it put pressure on wage rates by 
forcii^ employen to bid against high compensation levels. These are 
not matters that are difficult to grasp. Those who beUeve so almost 
certainly underrate the intelligence and responsibility of imion 
leaders, the rank and file, and of workers generally. 


As matters now stand there is but one point at which the American 
economy can function. That is the level at which virtually the full 
labour force is employed. This, we have seen, is a point of consider- 
able tension. The synthesis of consumer wants must proceed at a 
high and what could be a breakneck rate. At full employment 
the economy is patently unstable. Prices move relentlessly upward. 
But if production is much below the full employment level, a 
drastic reduction in income is visited on those who are imable to 
find jobs. This is taken as a serious indication of economic failure, 
and is. 

With C.G.C. we widen the band within which the economy can 
function. This we do by insuring that no particular group of people 
is singled out for misfi>rtune whm demand falls below full employ- 
ment levels. The manifest unfiiimess of doii^ so now excludes im- 
employment as a policy. Or, to put the matter di&rently, we are 
seeking to ensure that there is a range of output over which the 
economy can function which accords with the imperfect and awk- 
ward instruments available to regulate the level of output. At present 
the problem of keeping the economy at full employment levels and 
avoiding inflation is roughly equivalent to asking a reluctant surgeon 
to do a lobotomy with a spade. In addition, C.G.C. hdps ensure that 
mild unemployment will not become serious unemployment. It adds 



to purchasii^ power and demand as unemployment increases and to 
the labour force as tmemployment declines. 

Those who are appalled by a measiure which seems to give sanction 
to unemployment should bear several facts in mind. The unemploy- 
ment here being tolerated is at the margin. The total civihan labour 
force in 1956 was 67*5 milHon. Subject to considerations to be men- 
tioned in a moment, economic management requires an operating 
margin of possible unemployment of up to perhaps four miUion. 
There are no longer grounds for contending that tlie goods produced 
by these workers are of urgent importance. Given the stigmata 
anciently associated with idleness, the effect of this unemployment on 
those affected may be a more serious matter. 

However, as usual in economic affeirs, the goal is not perfection 
but the best that can be managed. C.G.C. represents a marked 
improvement over the present situation. It offers the prospect of a 
sufficient operating margin for price stabihty. It compensates the 
imemployment associated with dais margin, whereas such unemploy- 
ment may now occur anyway and without effective compensation. 
By adding a new and important automatic stabilizer, it helps to 
ensure that the imemployment associated with stabiUty will not be- 
come the more serious imemployment associated with depression. 
This requires a special word. 

Through increased pubhc outlays and through the reduction or 
remission of taxes, we have at hand measures for dealing with a 
deficiency in aggregate demand and thus with depression. The use of 
these measures is not in conffict with other social goals and for this 
reason depression, in contrast with inflation, is not an intractable 
problem of the affluent society. None the less, it remains the major 
threat to economic security. In particular, private spending can fall 
away more rapidly than fiscal measures can provide a substitute. 
Hence there is always danger of painful unemployment while cor- 
rective action is getting under way or overtaking a deflationary 
spiral. Hiis is made more probable because of the inevitability of 
debate over whether the time has arrived for deUberate fiscal action 
—for spending or tax reduction— and the omnipresent hope that 
if things are left alone recovery will come anyway. We have also 
seen that the darker of the downward spiral has been enhanced 


by the modem process of consumer demand and debt creation. 

C.G.C. is not a substitute for other fiscal measures. But it does 
ensure comparative stability in wage income. This is a large sector of 
total income. It is also the one which is most threatened by the large 
commitment to consumer debt, i.e. it is here that in the event of 
deflation there is danger of a large cut in current spending as people 
seek to maintain their debt service. Most important, C.G.C. elides 
the danger, indeed the near certainty, of delay that is implicit in 
deliberate fiscal action. 

Our need is for a measure which enables us to escape the tensions 
that are inevitable in the present imperative to produce at capacity, 
and the hazards in trying to do so, while improving our defences 
against more serious imcmploymcnt. All of this is accomplished by 
lifting the level of compensation as employment recedes and as un- 
employment changes its basic diaracter hrom an incident in job 
transfer, to a source of requisite slack for price stability, to a basic 
dureat to economic security. 

To repeat, all this implies a lessened pressure on die labour force. 
It implies that a small amoimt of unemployment will, in a degree, be 
considered normal. 

In recent years there has been the beginning of a discussion of the 
four-day week. In 1956 it was formally advanced as a prospect by the 
Republican candidate for the Vice-presidency, Mr. Richard M. 
Nixon. This discussion tacidy accepts the fact that we do not urgendy 
need the goods that are produced on the other two or three. Perhaps 
the problems of at^usting to three days’ leisure a week are not gready 
less serious than those of adjusting to radicr longer periods— properly 
paid, it is again to be recalled— at intervals during a lifetime. 


Since inflation is the implacable enemy of social balance, we cannot 
have it in a society where the redress of such balance is a central goal. 
The eflcct of C.G.C. is to make tolerable the unemployment vdiidi 
is associated with price stability. To minimize this unemployment, 
even diot^ it has been rendered at least partially painless, will 
still be thought by many a desirable goal of policy. It will also 



have the probable effect of increasing the rate of economic growth. 

If such a maximum employment policy is pursued, and if inflation 
is to be avoided, the only possible course is to have more controls. 
Given full employment or any dose approach to it, wages and prices 
are subject to large discretionary movements. The only preventative 
is some public restraint on this discretion. 

This might not be so very difficult to arrange. In the conventional 
wisdom the only possible system of control is one that controls all 
prices and aU wages. This is then, and perhaps rightly, dismissed as 
unworkable, at least in ordinary times. But more limited action might 
restrain the interaction of prices and wages and allow the economy to 
approach more closely to full employment without sacrifice of price 
stability. It need not cover all industries. No problem exists where 
there are no unions and where employers obviously have no dis- 
cretionary power over prices. There arc other industries— like the 
service trades— whidi could probably be dismissed as derivative 
rather than pace-setting in their role. Where, on the basis of past 
behaviour, prices and wages do interact to bring persistent price 
advances, wage increases that are held to require a price increase 
might be subject to ratification by a public tribunal or one on which 
representatives of man^ement, labour, and the public participated. 
It is not inappropriate that the public should intervene when it is the 
public that pays. Wage increases not alleged to require price in- 
creases would not be subject to such ratification. Wage advances so 
granted and those foimd to be within the capacity of the Industry to 
absorb could not thereafter, without showing of cause, be offiet by 
price increases. There is no reason why such or— since this suggestion 
is illustrative— similar arrangements could not be highly decentral- 
ized and characterized by comparative informality. 

In one branch of the conventional wisdom— given patience, fidth, 
and prayer- unemployment, inflation, and controls can all be 
avoided. The real menace in this view lies with diose who persist in 
suggesting that we cannot reconcile irreconcilables. At a minimum 
they arc inconvetiient; at the worst they arc subvenive. In light of 
existii^ attitudes a limited system of controls might wdl provide the 
most satisfactory reconciliation. But a divorce of production firom 
the imperatives of employment and individual economic security is 


also a possibility. So is a combination of the two. A rich country, like 
a rich man, has the luxury of choice. The only thing it lacks, much 
as we might wish for it, is die privilege of avoiding choice. 

Those who find intolerable the designs here offered may wish to 
reflect, at least momentarily, on whether it is because they are assert- 
ing this privilege. 



The Redress of Balance 

Our next task is to find a way of obtaining and then of maintaining 
a balance in tlie great flow of goods and services with which our 
wealdi each year rewards us. In particular, we must find a way to 
remedy die poverty whicli afflicts us in pubUc services and which is 
in such increasingly bizarre contrast with our affluence in private 
goods. This is necessary to temper and, more hopefully, to ehminate 
the social disorders which are the counterpart of die present im- 
balance. It is necessary in the long run for promoting the growth of 
private output itself. Such balance is a matter of elementary common 
sense in a country in which need is becoming so exiguous that it 
must be cherished where it exists and nurtured where it does not. To 
create the demand for new cars we must contrive elaborate and 
functionless changes each year and then subject die consumer to 
ruthless psycliological pressures to persuade him of their importance. 
Were this process to falter or break down, the consequences would 
be disturbing. In the meantime there are large ready-made needs for 
schools, hospitals, slum clearance and urban redevelopment, sanita- 
tion, parks, playgrounds, police, and a thousand odier things. Of 
these needs almost no one must be persuaded. They arc unavailable 
only because, as pubHc officials of aU kinds and ranks explain each day 
with practised skill, the money to provide them is unavailable. So it 
has come about diat we get growth and increased employment along 
the dimension of private goods only at the price of increasingly fran- 
tic persuasion. We exploit but poorly the opportunity along the 
dimension of pubhe services. The economy is geared to the least 
urgent set of human wants. It would be far more secure if it were 
based on the whole range of need. 





The problem will not be settled by a resolve to spend more for 
schools and streets and other services and to tax accordingly. Such 
decisions are made every day, and they do not come to grips with the 
causes of the imbalance. These lie much deeper. The most important 
difference between private and public goods and services is a tech- 
nical one. The first lend themselves to being sold to individuals. The 
second do not. As noted above,^ in die evolution of economic enter- 
prise, the things wliich could be produced and sold for a price were 
taken over by private producers. Those that could not, but which 
were in the end no less urgent for that reason, remained with the 
state. Bread and steel went naturally to private enterprise, for they 
could readily be produced and marketed by individuals to indi- 
viduals. Police protection, sanitation, and sewer systems remained 
with pubhc authority for, on the whole, they could not. Once the 
decision was taken to make education universal and compulsory, it 
ceased to be a marketable commodity. With the rise of the national 
state so did national defence. The line between pubHc and private 
activity, as we Anew it at any given moment, is the product of many 
forces— tradition, ideological preference, and social urgency all play 
some part. But to a far greater degree than is commonly supposed, 
functions accrue to the state because, as a purely technical matter, 
there is no alternative to public management. 

The goods and services which are marketable at a price have a 
position of elementary strategic advantage in the economy. Their 
price provides the income which commands labour, capital, and raw 
materials for production. This is inheroit in the productive process. 
In the absence of social intervention, private production will mono- 
polize all resources. Only as something is done about it Avill resources 
become aArailable for public services. In Anglo-Saxon constitutional 
history, the requirement of an affirmative act to divert resotnrees 
firom priA^te to pubUc use Avas the key weapon of parliament in con- 
tending for power Avith the sovereign. The king had no— or, more 
precisely, but few— recurring revenues. Hence all taxes for public 

^ Pages 104-107. 



purposes had to be specifically voted. Gradually it became settled 
tliat diere must be redress of grievances before supply. Apart firom 
the use of the power of the purse as the protector of popular Uberty, 
there was much else to be said for the practice. In poor and ill- 
governed societies private goods meant comfort and life itself Food, 
clothing, and shelter, all technically subject to private purchase and 
sale, had an urgency greater than any public service with the possible 
exception of the provision of law and order. The burden of proof 
was on any step that diverted resources from the satisfaction of these 
simple biological requirements to the almost invariably spenddirift 
services of the state. 

Recurring revalues are now commonplace. The control of the 
purse is still an element in the distribution of power between the 
legislative and executive authority. But it is only one element in a 
complex relationship and, imlike England imder the Stuarts, the 
approval of expenditures, not the voting of taxes, is the linchpin of 
the legislature’s power. Yet a good deal remains unchanged. We still 
seek to synthesize, on behalf of private goods, an urgency that was 
once provided not by Madison Avenue but by the even more eilec- 
tive importunities of hunger and cold. And for a very large part of 
our public activity, revenues are relatively static. Although aggregate 
income increases, many tax systems return a comparatively fixed 
dollar amoimt. Hence new public needs, or even the increase in the 
requirements for old ones incident on increasing population, require 
affirmative steps to transfer resources to public use. There must first 
be a finding of need. The burden of proof lies with those who pro- 
pose the expenditure. Resources do not automatically accrue to 
public authority for a decision as to how they may best be distributed 
to schools, roads, police, pubUc housing, and other claimant ends. 
We are startled by the thought It would lead to waste. 

But with increasing income, resources do so accrue to the private 
individual. Nor when he buys a new car out of increased income is 
he required to prove need. We may assume that many fewer cars 
would be purchased than at present were it necessary to make a 
positive case for their purchase. Such a case must be made for schools. 




The solution is a system of taxation which automatically makes a 
pro rata share of increasing income available to public au^ority for 
public purposes. The task of public authority, like that of private 
individuals, will be to distribute this increase in accordance with 
relative need. Schools and roads will then no longer be at a disad- 
vantage as compared with cars and television sets in having to prove 
absolute justification. 

The practical solution would be much eased were the revenues of 
the federal government available for the service of social balance. 
These, to the extent of about four-fifths of the total, come from per- 
sonal and corporation income taxes. Subject to some variations, these 
taxes rise ratlier more than proportionately with increases in private 
income. Unhappily they are presently pre-empted in large measure 
by the requirements of national defence and the competition of arms. 
In the mid-fifties defence expenditures were rather more than half of 
all the expenditures of the federal government and rather more than 
the total expenditures of states and localities combined. Were this 
sum to become available in any considerable part for the civilian 
services of governments in the years ahead, social balance could be 
quickly restored. And present income taxes would admirably keep 
the balance and without formally upsetting the present compromise 
on the question of equality. The word ‘formally’ should perhaps be 
stressed, for in one articulate and influential branch of the conven- 
tional wisdom high tax rates are justifiable for military purposes but 
immoral and confiscatory if used for civilian purposes. 

Perhaps the time will come when federal revenues and the normal 
annual increase will be not pre-empted so extensively for military 
purposes. Conventional attitudes hold otherwise; on all prospects of 
mankind there is hope for betterment save those having to do with 
an eventual end, wifoout war, to die arms race. Here the hard cold 
voice of realism warns there is no hope. Perhaps things are not so 
utterly hopeless. 

But meanwhile the problem of social balance must be foced. So far 
as the federal government is concerned, it must be accomplished 



while relying primarily on the personal and corporate income 
taxes. As we shall see presently, there are odier taxes with a liigh 
claim to consideration, but there are odier units of government with 
higher claim to their use. As usual, the solution is implicit in the 
alternatives. The test is not that liigh mihtary costs make reductions 
in other public outlays necessary. Rather it is whether, given these 
mihtary outlays, we are more in need of the services that improve 
social balance or die additional private goods with which we are 
more affluently supplied than ever before. When die issue is so 
presented and faced, there can be but one conclusion.^ 

However, even though the higher urgency of the services for 
social balance is conceded, there is still the problem of providing 
the revenue. And since it is income taxes that must be used, the 
question of social balance can easily be lost sight of in the reopened 
argument over equahty. The truce will be broken and hberals and 
conservatives willjoin batde on this issue and forget about the poverty 
in the public services that awaits correction and, as we shall see pre- 
sently, the poverty of people whicli can only be corrected at in- 
creased pubUc cost. All this— schools, hospitals, even the scientific 
research on whidi increased production depends— must wait wliile 
we debate the ancient and unresolvablc question of whether the rich 
arc too rich. 

The only hope— and in the nature of things it rests primarily with 
liberals— is to separate the issue of equahty firom that of social 
balance. The second is by far the more important question. The fact 
that a tacit truce exists on the issue of inequahty is proof of its com- 
parative lack of social urgency. In the past the Uberal poUtician has 
countered the conservative proposal for reduction in top-bracket 
income taxes with the proposal that rehef be confined to the lower 
brackets. And he has insisted that any necessary tax increase be carried 
more tiian proportionately by the higher income brackets. The result 

^This discussion assumes a satisfactory level of employment. Taxes and expen- 
ditures may be respectively lowered and increased to correct an insufficiency in 
demand. When social imbalance is great it will be dear that there is a strong case 
for correcting a shortage of demand by increased spending for needed public ser- 
vices rather than by a tax reduction whidi allows of increased spendi^ for less 
needed private goods. 



has been to make him a co-conspirator widi the conservative in 
reducing taxes, whatever the cost in social balance; and his insistence 
on making taxes an instrument of greater equaHty has made it diffi- 
cult or impossible to increase them. Meanwhile, the individuals with 
whom he sympathizes and whom he seeks to favour are no longer 
the tax-ridden poor of Bengal or the first Empire but people who, by 
all historical standards, arc themselves comparatively opulent citizens. 
In any case, they would be among the first beneficiaries of the better 
education, health, housing, and other services which would be the 
fiuits of improved social balance, and they would be the long-run 
beneficiaries of more nearly adequate investment in people. 

The rational hberal, in tlic future, will resist tax reduction, even 
that which ostensibly favours the poor, if it is at the price of social 
balance. And, for the same reason, he will not hesitate to accept in- 
creases that are neutral as regards die distribution of income. His 
classical commitment to greater equality can far better be kept by 
attacking as a separate issue die more egregious of the loopholes in 
the present tax laws. These loopholes— preferential treatment of 
capital gains and the special depletion allowances for mineral, includ- 
ing in particular oil, recovery— arc strongly in conflict with tradi- 
tional liberal attitudes, for this is inequality sanctioned by the state. 
There is work aiough here for any egalitarian crusader. 


While there is much that the federal government must do by way of 
redressing balance, as Chapter XVHI has suggested, it is in state and 
local services that the imbalance is most striking. Here, however, the 
solution— though it involves another wrench in liberal attitudes— is 
most clear. It involves much expanded use of the sales tax. 

So long as social balance is imperfect there should be no hesitation 
in urging high rates. Coverage should be general on consumer pro- 
ducts and services. In the aflluent society no useful distinction can be 
made between luxuries and necessaries. Food and clothing are as 
difficult as ever to do without. But they can be and firequendy are 
among the most opulent of expenditures. 

The relation of die sales tax to the problem of social balance is 



admirably direct. The community is affluent in privately produced 
goods. It is poor in public services. The obvious solution is to tax the 
former to provide foe latter— by making private goods more expen- 
sive, public goods arc made more abundant. Motion pictures, elec- 
tronic entertainment, and cigarettes are made more costly so that 
schools can be more handsomely supported. We pay more for soap, 
detergents, and vacuum cleaners in order that we may have cleaner 
cities and less occasion to use them. We have more expensive cars 
and petrol so that we may have highways and streets on whicli to 
drive them. Food being comparatively cheap and abundant, we tax 
it in order to have better medical services and better healfo in which 
to enjoy it. This forthright solution has foe furdier advantage that 
sales taxation can be employed with fair efficiency by states and even 
by cities. It is in the services rendered by these governments that the 
problem of social balance is especially severe. The yield of the sales 
tax increases with increasing production. As wants are contrived for 
private goods more revenues are provided for public use. The general 
property tax, foe principal alternative to foe sales tax, is rigid and 
inflexible. Since its rates must ordinarily be raised for additional ser- 
vices, including those that are associated with increasing income and 
product, foe burden of proving need is especially heavy. This tax is 
a poor servant of social balance. 

During foe present century foe use of sales taxation by states and 
cities has been growing. Liberals have ordinarily resisted its use. At a 
minimum they have viewed it with grave misgiving. This has again 
made the liberal foe effective enemy of social balance. The reasons 
for this opposition provide an interesting example of how ideas, as 
they remain stereotyped in face of change, can force those who hold 
them into roles inconsistent with their own professions. The Ameri- 
can liberal has been, all things considered, foe opponent of better 
schools, better communities, better urban communications, and 
indeed even of greater economic stability. 

The eff^t of a sales tax varies greatly as between a poor and an 
affluent country, and foe difference is one not of degree but of kind. 
Under foe ancien regime in France foe tax on salt achieved an endur- 
ing reputation for its oppressiveness which it retains in parts of 
modem India to this day. b foe United States a tax on salt, even one 


that doubled or trebled its price, would work no perceptible hard- 
ship. It is not that salt is more dispensable now than in the day of die 
gabelle. But where it was then a major object of expenditure it is now 
an insignificant one. And where the price of salt once afiected visibly 
and direedy what remained for other use, it is now too small to have 
a noticeable effect. 

As with salt so with other things. In a fiunily which can buy only 
bread and doth, a tax on bread and dothing means that children will 
be hungrier and less well clad. In a family which can buy many 
things the adjustment comes at the margin in spending for petrol, 
instalment payments, the races, or the quality of the ceremonial steak. 

Thus docs affluence alter the case against sales taxation. It wiU be 
argued that some people are still very poor. The sales tax, unlike the 
income tax, weighs heavily on the small consumption of such indi- 
viduals. But if the income tax is unavailable or in service of other 
ends, the only alternative is to sacrifice social balance. A poor society 
righdy adjusts its poHcy to the poor. An affluent sodety may pro- 
perly inquire whether, instead, it shouldn’t remove the poverty. As 
we shall see in the next chapter, moreover, improved sodal balance 
is one of the first requisites for the elimination of poverty. The 
modem liberal rallies to protect the poor firom the taxes which in the 
next generation, as the result of a higher investment in their children, 
would eliminate poverty. 


There is another objection to gready multiplied use of the sales tax 
which is that, unlike the persoiul and corporation income taxes, it 
makes no positive contribution to economic stability. The latter do 
so in two respects. Falling on the corporations and the well-to-do, 
they weigh most heavily on income ^t is on its way to be saved 
rather than on income that is on its way to be spent for consumers* 
goods. The investment of saved income has long been considered the 
most mercurial and hence the least certain link between the receipt 
of income and its return to the spendii^ stream. The income tax thus 
taps and ensures spendii^ where this is intrinsically the least cer- 
tain. Income taxes and especially the personal income tax have, in 



addition, their role as built-in stabilizers of the economy. As incomes 
the personal tax, through the mechanism of the progressive rates, 
automatically reduces itself. As a result, and not Avithout reason, it 
has come to be regarded as central to the strategy of economic man- 

However, it is of the essence of the present argiunent that other 
goals share in urgency with protection and maximization of total 
output. One is the social balance that is served by sales taxation. 
Moreover, die principal purpose of the measures outlined in the last 
chapter was to make possible the escape from the conmiitment to 
maximum production widiout doing damage to individual econo- 
mic security. 

But social balance also adds to the stability and security of pro- 
duedon along another dimension, for we have seen that exploitation 
of the solid needs of the pubUc sector of die economy, as distinct from 
the tenuous and expensively syndiesizcd wants for private goods, 
will almost certainly contribute to stability and orderly economic 
growth. Production will then be based on die whole range of human 
wants, not a part. As such it will be more secure. 

Finally, with better social balance, investment in human resources 
will be kept more nearly abreast of that in material capital. This, we 
have seen, is the touchstone for technological advance. As such it is a 
most important and possibly the most important factor in economic 
growth. Such are the paradoxes of economic policy. 

The much increased use of the sales tax, as here suggested, is 
obviously not intended as a substitute for the income tax. This has 
long been the fond dream of conservatives. The present intention, 
which is to break the deadlock imposed by the extraneous relation 
of the income tax to equality and divert a much increased share of 
resources to public need, accords with the conventional wisdom of 
neither conservatives nor liberals. 

None the less, it is the latter who will be most reluctant. Apart from 
the ancient commitment to equality, the Keynesian system is, pre- 
eminently, the conventional wisdom of Uberals. And here support 
for the income tax is categorical. Keynes did not foresee that the 
rapid expansion in output which was implicit in his ideas would soon 
bring us to the time when not total output but its composition would 



become die critical matter. Had he survived, he would no doubt 
have been perturbed by the tendency of his followers to concentrate 
their poUcy on die single goal of increased output. He did not lack 
discriminadon. But his followers or some of them will almost cer- 
tainly continue to protect the Keynesian system, with its concentra- 
tion on aggr^ate demand and output, from ideas which Keynes 
might have been disposed to urge. Such is the &te of anyone who 
becomes a part of the conventional wisdom. 


Given a sufficiency of demand, the responding production of goods 
in the modem economy is almost completely reliable. We have seen 
in the early chapters of this essay why men once had reason to regard 
the economic system as a meagre and perilous thing. And we have 
seen how these ideas have persisted after the problem of production 
was conquered. There will be some who will still suggest that to 
divert more resources to pubhc use will be to imperil private pro- 
duction. Hiere is not the slightest ground for this suggestion; and we 
have seen, in fact, that the risk lies in another direction— that our 
rehance on private goods is by methods that threaten the stabiUty of 
demand, and that social imbalance imperils the prospect for long-run 
economic growdi. Still the fear will be expressed. 

Here is the last advantage of sales taxation as a technique for divert- 
ing resources to pubUc use. This tax has been recommended for years 
by the most impeccable of conservatives. Such august audiences as 
the National Association of Maniffiicturers have repeatedly heard and 
applauded speeches reciting its virtues. It lias been made clear that it 
does not damage incentives or interfere with production. It is true 
that the sales tax has been given these credenti^ as an alternative to 
other taxes. But it has received this blessing from those who speak 
with the prestige of producers. As a political point this is not 

One final observation may be made. There will be question as to 
what is the test of balance— at what point may we conclude that 
balance has been achieved in the satisfiiction of private and public 
needs. The answer is that no test can be apphed, for none exists. The 



traditional formulation is that the satisfaction returned to the com- 
munity horn a nurginal increment of resources devoted to public 
piuposes should be equal to the satisfaction of the same increment in 
private employment. These are incommensurate, partly because dif- 
ferent people are involved, and partly because it makes the cardinal 
error of comparing satisfaction of wants that are synthesized with 
those that are not. 

But a precise equilibrium is not very important. For another mark 
of an affluent society is the opportunity for the existence of a con- 
siderable margin for error on such matters. The present imbalance is 
dear, as are the forces and ideas which give the priority to private as 
compared with public goods. This being so, the direction in which 
we move to correct matten is utterly plain. We can also assume, 
given the power of the forces that have operated to accord a priority 
to private goods, that the distance to be traversed is considerable, 
when we arrive, the opulence of our private consumption will no 
longer be in contrast with the poverty of our schools, the tmloveli- 
ncss and congestion of our cities, our inability to get to work without 
struggle, and the social disorder that is assodated with imbalance. 
But the precise point of balance will never be defined. This will be of 
comfort only to those who believe that any failure of definition can 
be made to score dedsively against a larger idea. 



The New Position of Poverty 

‘The study of die causes of poverty’, Alfred Marshall observed at the 
turn of the century, ‘is the study of the causes of the degradation of a 
large part of mankind.’ He spoke of contemporary England as well 
as of the world beyond. A vast number of people both in town and 
country, he noted, had insufficient food, clothing, and house-room; 
they were: ‘Overworked and undertaught, weary and careworn, 
without quiet and without leisure.’ The chance of their succour, he 
concluded, gave to economic studies ‘their chief and their highest 

No contemporary economist would be likely to make such an 
observation about the United States. Conventional economic dis- 
course does make occasional obeisance to the continued existence of 
some poverty. ‘We must remember that wc still have a great many 
poor people.’ This usefully allays uneasiness about the relevance of 
conventional economic goals and especially of economic efficiency. 
For some people wants must be synthesized. Hence the importance 
of the goods is not per se very high. But others are far closer to need. 
And hence wc must not be cavalier about the urgency of providing 
them with the most for the least. The sales tax may have merit for the 
opulent, but it still bears heavily on the poor. Thus poverty survives 
in economic discourse pardy as a buttress to die conventional econo- 
mic wisdom. Still, in a world of a weekly industrial wage of $8o 
and a $3,960 median family income, it can no longer be presented 
as a univenal or massive affliction. It is more nearly an after- 

^ Prmcipks cf Economia (Sth cd.), pp. 2-4. 



The privation of which Marshall spoke was, a half<x5ntury ago, 
die common lot at least of all who worked without special skill. As a 
general affliction, it was ended by increased output which, however 
imperfeedy it may have been distributed, nevertheless accrued in 
substantial amount to those who worked for a living. The result was 
to reduce poverty from the problem of a majority to dial of a 
minority. It ceased to be a general case and became a special case. It is 
this which has put the problem of poverty into its peculiar modem 


For poverty does survive. There is no firm definition of this pheno- 
menon and again, save as a tactic for countering the intellectual 
obstructionist, no precise definition is needed. In part it is a physical 
matter; those afflicted have such limited and insufficient food, such 
poor clodiing, such crowded, cold and dirty shelter that life is painfiil 
as well as comparatively brief. But just as it is far too tempting to say 
that, in matters of living standards, everytliing is relative, so it is 
wrong to rest everything on absolutes. People are poverty-stricken 
when dieir income, even if adequate for survival, falls markedly 
behind that of the community. Then they cannot have what the 
larger community regards as die minimum necessary for decency; 
and they cannot wholly escape, therefore, the judgment of the larger 
community that they are indecent. They are degraded for, in the 
literal sense, they live outside die grades or categories which the 
community regards as acceptable. In the mid-fifties, by acceptable 
estimate, one family in thirteen in the United States had a cash 
income from all sources of less than a thousand dollars. In addition a 
very large number of individuals, not members of families, were in 
this income class. To some extent family life is itself a luxiuy of an 
adequate income. The hard core of the very poor was declining but 
not with great rapidity.* 

A substantial share of these low incomes are in ^[riculture— in 

* Statistical Abstract, igs^, p. 312. In 1955, 7*7 per cent of families were estimated 
to have had incomes of less than |i,ooo as compared with 8*8 in 1954, 8*6 in 1953 
and 8*5 in 1952. Ihese figures reflected a reduction fix>m 11*5 per cent in 1950 
when, however, prices were considerably lower. 


1954, 27*4 per cent of all farm families had cash incomes of less than 
a thousand dollan as compared with 4*9 per cent of urban fiunilies 
who were below this level. These rural families had further incomes 
in the form of shelter and farm-grown food which causes the esti- 
mate of cash income to understate dicir position. However, there is 
probably more danger of exaggerating than of minimizing the con- 
tribution of the impainted shacks, the reluctant animals, and the 
barren garden patches by whidi the rural poor eke out their income. 

This agricultural poverty has a tendency to be concentrated in 
specific areas. The Appalachian plateau and its valleys, parts of the 
southern coastal plain and the Piedmont plateau, the country of low 
hills between the Appalachians and the Mississippi, the cut-over lands 
of the Lake States, the Ozark plateau, all provide examples. In 1950 
in such areas nearly a miUion farm families had^ross receipts of less 
than $1,200 and about a quarter of a million had less than $250. In 
the southern Appalachians the average net income of all full-time 
&rmers in 1949 was less than $500. In the southern Piedmont the 
average was only slightly higher. In 1950 a milUon and a half &rm 
fbnilies, principally in die above-mentioned areas, liad net cash 
incomes from all sources of less than a thousand dollars.^ The modem 
locus of poverty is even more the rural than the turban slum. 


One can think of modem poverty as falling into two broad cate- 
gories. First there is what may be called case poverty. This one 
encounters in every community, mral or urban, however prosperous 
that community or the times. Case poverty is the poor fiurm family 
with the junk-filled yard and the dirty children playing in the bare 
dirt. Or it is the grey-black hovel beside the railway tracks. Or it is 
the basement dwelling in the alley. 

Case poverty is commonly and properly rdated to some charac- 
teristic of the individuals so afflicted. Nearly everyone else has 
mastered his environment; this proves that it is not intractable. But 

^ Developmmt of Agrieulum’s Human Resources, A Report on Problems of Low 
Income Farmers (United States Department of Agricultute, 1955). Figures showing 
gross receipts exclude fumers over sbety-five years of age. 



some quality peculiar to the individual or family involved— mental 
deficiency, bad health, inability to adapt to the discipline of modem 
economic life, excessive procreation, alcohol, insufficient education, 
or perhaps a combination of several of these handicaps— has kept 
these individuals from participating in the general well-being. 

Second, there is what may be called insular poverty— that which 
manifests itself as an ‘island’ of poverty. In die island everyone or 
nearly everyone is poor. Here, evidently, it is not so easy to explain 
matters by individual iiudequacy. We may mark individuals down 
as intrinsically deficient; it is not proper or even wise so to charac- 
terize an entire community. For some reason the people of the island 
have been firustrated by their environment. 

This is not the place to explore in detail the causes of insular 
poverty. They are complex and many of the commonly assigned 
causes are eidier excessively simple or wrong. The resource endow- 
ment or the fertility of the land, the conunonplace explanations, have 
htde to do with it. Connecticut, a state of high incomes, has few 
resources and a remarkably stony soil. West Virginia is richly en- 
dowed. Connecticut has long been rich and West Virginia poor. 

Insular poverty has something to do with the desire of a compara- 
tively large mmiber of people to spend their lives at or near the place 
of their birth. Tliis homing instinct causes them to bar the solution, 
always open as an individual remedy in a coimtry without barriers to 
emigration, to escape the island of poverty in which diey were bom. 
And so long as they remain they are committed to a pattern of j^ri- 
cultural land use or of mining, industrial, or other employment 
which is unproductive, episodic, or otherwise unremunerative.^ 
Meanwhile the poverty of the commimity ensures that educational 
opportunities will be limited, that health services will be poor, and 

^ Thus in the Appalachian plateau, settlement occurred aloi^ the valleys on 
farms which were of the small scale appropriate to a largely self^uffident agricul- 
ture. Time has tendered such viticulture obsolete. Other areas produce the same 
crops far more efiiciently; chaining standards have made what once seemed a 
tolerable standard of living exceedingly primitive. Yet the massive reorganization 
of land use that would be required— fu larger farms or conceivably h^hly capital- 
ized forest enterprises— are &r beyond the capacities, both education^ and finan- 
cial, of the people involved. Meanwhile the homing instmet causes them— or at 
least a huge number— to persist in the area. 



that subsequent generations will be ill prepared either for mastering 
the enviromnent into which they arc bom or for migration to areas 
of higher income outside. It is a reasonable presumption, too, that the 
homing instinct operates most powerfully among the poorly edu- 

In some circmnstances escape may not be possible. Especially in 
the urban slum, race or poverty may confine individuak to an area 
of intrinsically limited opportunity. And once again the environ- 
ment perpetuates its handicaps through poor schools, evil neighbour- 
hood influences, and bad preparation for life. 

The most certain thing about modem poverty is that it is not 
efficiendy remedied by a general and tolerably well-distributed ad- 
vance in income. Case poverty is not remedied because the specific 
individual inadequacy precludes employment and participation in 
the general advance. Insular poverty is not direedy alleviated because 
the advance docs not necessarily remove the specific firustrations ot 
environment to which the people of these islands are subject. Tlus 
is not to say that it has no effect. Secure job opportunities elsewhere, 
a concomitant of industrial advance, work against the homing 
instinct. And so even more direedy does the spread of industrializa- 
tion. The appearance of industry in parts of the Tennessee Valley 
area has had a strong remedial efifrct on the insular poverty of those 
areas. But it remains that advance caimot improve the position of 
those who, by virtue of self or enviromnent, cannot participate or 
are not reached. 


These circumstances have caused a profoundly interesting although 
litde recognized change in what may be termed the political eco- 
nomy of poverty. With the transition of the very poor firom a 
majority to a comparative minority position, they ceased to be auto- 
matically an object of intnest to the politician. Political identification 
with those of the lowest estate has andendy brought the rqproaches 
of the well-to-do, but it has had the compensating advantage of 
alignment with a large majority. Now any politician who speaks for 
the very poor is speaking for a small and also inarticulate minority. 
As a result the modem Hberal politidan aligns himself not with the 


poverty-ridden members of the community but with the fiur more 
numerous people who enjoy the far more affluent income of (say) 
the modem trade union member. Ambrose Bierce, in The DeviVs 
Dictionary, called poverty ‘a file provided for the teeth of the rats of 
reform*. It is so no longer. Reform now concerns itself with people 
who are relatively wcU-to-do— whether the comparison be with 
their own past or with those who are really at the bottom of the 
income ladder. 

The poverty-stricken are furdier forgotten because it is assumed 
that with increasing output poverty mmt disappear. Increased output 
eliminated the general poverty of all who worked. Accordingly it 
must, sooner or later, eliminate the special poverty that still remains. 
As we have just seen, this is not to be expected or, in any case, it will 
be an infinitely time-consiuning and unreliable remedy. Yet just as 
the arithmetic of modem politics makes it tempting to overlook the 
very poor, so the supposition that increasing output will remedy 
their case has made it easy to do so too. 

To put the matter another way, die concern for inequality had 
vitality only so long as die many suffered privation while a few had 
much. It did not survive as a burning issue in a time when the many 
had much even thougli others had much more. It is otu: misfortune 
that when inequaUty declined as an issue, the slate was not left dean. 
A residual and in some ways rather more hopeless problem remained. 


An affluent society, that is also both compassionate and rational, 
would, no doubt, secure to all who needed it the minimum income 
essential for decency and comfort. The cormpting efflxt on the 
human spirit of a small amount of imeamed revenue has unquestion- 
ably been exaggerated as, indeed, have the character-building values 
of hunger and privation. To secure to each family a minimum stan- 
dard, as a normal function of the sodety, would hdp ensure that the 
misfortunes of parents, deserved or otherwise, were not visited on 
their children. It would help ensure tiiat poverty was not sdf- 
perpetuating. Most of the reaction, which no doubt would be almost 
universally adverse, is based on obsolete attitudes. When poverty was 



a majority phenomenon, such action could not be afforded. A poor 
society, as this essay has previously shown, had to enforce the rule 
that the person who did not work could not cat. And possibly it was 
justified in the added cruelty of applying the rule to those who could 
not work or whose efficiency was far below par. An affluent society 
has no similar excuse for such rigour. It can use the forthright remedy 
of providing for those in want. Nothing requires it to be compas- 
sionate. But it has no high philosopliical justification for callousness. 

None the less any such fordiright remedy for poverty is beyond 
reasonable hope. Also, as in the limiting case of the alcoholic or the 
mental incompetent, it involves difficulties. To spend income re- 
quires a minimum of character and inteUigence even as to produce it. 
By far the best hope for the cHmination, or in any case the mini- 
mization, of poverty lies in less direct but, conceivably, almost 
equally effective means. 

The first and strategic step in an attack on poverty is to sec that it is 
no longer self-perpetuating. This means ensuring that the investment 
in children firom families presently afflicted be as htde below normal 
as possible. If the children of poor famihes have first-rate schools and 
school attendance is properly enforced; if the children, though badly 
fed at home, are well nourished at school; if the community has 
sound health services, and the physical well-being of the children is 
vigilantly watched; if there is opportunity for advanced education 
for those who quaHfy regardless of means; and if, especially in the 
case of urban communities, law and order are well enforced and 
recreation is adequate— then there is a very good chance that the 
children of the very poor will come to maturity widiout grave dis- 
advantage. In the case of insular poverty this remedy requires that the 
services of the community be assisted firom outside. Poverty is self- 
perpetuating because the poorest communities are poorest in the ser- 
vices which would eUminate it. To eUminate poverty efiBdently we 
should invest more than proportionately in the children of the poor 
community. It is there that high-quaUty schools, strong health ser- 
vices, special provision for nutrition and recreation are most needed 
to compensate for the very low investment which families are able to 
make in their own offspring. 

The effect of education and related investment in individuals is to 



enable them either to contend more effectively with their environ- 
ment, or to escape it and take up life elsewhere on more or less equal 
terms with others. The role of education as an antidote to the homing 
instinct which crowds people into the areas of inadequate opportun- 
ity and frustration is also clear. However, in the strategy of the attack 
on insular poverty a place remains for an attack on the frustrations of 
the environment itself. This is particularly clear in the case of the 
slum. Slum clearance and expansion of low- and middle-income 
housing removes a comprehensive set of frustrations and greatly 
widens opportunity. There is a roughly parallel opportunity in the 
rural slum. By identifying a land use which is consistent with a satis- 
factory standard of living, and by assisting with the necessary re- 
organization of land and capital, pubhc authority can help individuals 
to surmount frustrations to which they are now subject. The process 
promises to be expensive and also time-consuming. But the question 
is less one of feasibihty than of will.* 

Nor is case poverty in the contemporary generation wholly in- 
transigent. Much can be done to treat those characteristics which 
cause people to reject or be rejected by the modem industrial society. 
Educational deficiencies can be overcome. Mental deficiencies can be 
treated. Physical handicaps can be remedied. The limiting factor is 
not knowledge of what can be done. Overwhelmingly it is our frilurc 
to invest in people. 


It will be clear that to a remarkable extent the requirements for the 
ehmination of poverty arc the same as for social balance. (Indeed a 
good deal of case poverty can be attributed to the failure to maintain 
social balance.) The myopic preoccupation with production and 
material investment has diverted our attention from the more urgent 
questions of how we are employing our resources and, in particular, 
from the greater need and opportunity for investing in penons. 

* The problem of the ratal slum, and its reorganization, is one on which one 
must say either very little or very much. I have had to follow the first course here. 

I have treated the problem at more length in ‘Inequality in Agriculture— Problem 
andProgramme', J. J. Morrison Memorial Lecture, Ontario Agricultural College, 
Guelph, Canada, 1956. 


Here is a paradox. When we begin to consider the needs of those 
who are now excluded from the economic system by accident, 
inadequacy, or misfortune— we find that the normal remedy is to 
make them or their children productive citizens. This means that 
they add to the total output of goods. We see once again that even 
by its own terms the present preoccupation with material as opposed 
to human investment is ineflScient. The parallel with investment in 
the supply of trained and educated manpower discussed above' will 
be apparent. 

But increased output of goods is not die main point. Even to the 
most intellectually reluctant reader it will now be evident that 
enhanced productive efficiency is not the motif of this volume. The 
very fiict that increased output offers itself as a by-product of the 
effort to eliminate poverty is one of die reasons. No one would be 
called upon to write at such length on a problem so easily solved as 
that of increasing production. The main point lies elsewhere. Poverty 
—grim, degrading, and ineluctable— is not remarkable in India. For 
few the fate is otherwise. But in the United States die survival of 
poverty is remarkable. We ignore it because we share with all 
societies at all times the capacity for not seeing what we do not wish 
to see. Anciendy this has enabled the nobleman to enjoy his dinner 
while remaining oblivious to die beggars around his door. In our 
own day it enables us to travel in comfort through south Chicago 
and the South. But while our fiiilure to notice can be explained, it 
cannot be excused. ‘Poverty’, Pitt exclaimed, ‘is no disgrace but it is 
damned annoying.’ In the contemporary United States it is not 
annoying but it is a disgrace. 

' Chapter XDC. 


Labour, Leisure, and the New Class 

In a society of high and increasing affluence there are three plausible 
tendencies as regards toil. As the production of goods comes to seem 
less urgent, and as individuals are less urgently in need of income for 
the purchase of goods, they will work fewer hours or days in the 
week. Or they will work less hard. Or, as a final possibihty, it may 
be that fewer people will work aU the time. 

In the last century a drastic decline has occurred in the work week. 
In 1850 it is estimated to have averaged just imder seventy hours, the 
equivalent of seven ten-hour days a week or roughly six at from six 
in the morning to six at night. A hundred years later the average was 
forty hours or five eight-hour days.^ 

Tliis decline reflects a tacit but unmistakable acceptance of the 
declining marginal urgency of goods. There is no other explanation. 
However, such is the hold of production on our minds that this 
explanation is rarely offered. The importance and rewards of leisure 
are urged, almost never the unimportance of goods. Or, since pro- 
duction per hour has been increasing as the work week has declined, 
it is said that we are able to reduce the work because more is pro- 
duced in less time. No mention is made of the fact that even more 
would be produced in more time. Or, finally, the decline is related to 
the feeling that steps must be taken to share the available work as 
productivity per worker rises. This also implies that the marginal 

Frederic Dewhurst and Associates, Americas Needs and Resources, A New 
Survey, p. 1053. These figures are the weighted average of agricultural and non- 
agricultural workers. The average work week in non-agricultural enterprise in 
1950 was estimated to be 38*8 hours. 


26 i 


urgency of production is low or negligible, but again the point 
remains unmade. 

A reduction in the work week is an mcceedingly plausible reaction 
to the declining marginal urgency of product. Over the span of 
man’s history, although a phenomenal amount of education, per- 
suasion, indoctrination, and incantation have been devoted to the 
efibrt, ordinary people have never been quite persuaded that toil is as 
agreeable as its alternatives. Thus to take increased well-being partly 
in the form of more goods and pardy in the form of more leisure is 
unquestionably rational. In addition, the institution of overtime 
enables the worker to go far to adjust work and income to his own 
taste and requirements. It breaks with the barbarous uniformity of 
the weekly wage with its assumption that all families have the same 
tastes, needs, and requirements. Few things enlarge the liberty of the 
individual more substantially than to grant him a measure of control 
over the amount of his income. 

Unfortunately in the conventional wisdom the reduction in hours 
has emerged as the only legitimate response to increasing affluence. 
This is at least pardy because the issue has never been ficed in terms 
of the increasing unimportance of goods. Accordingly, though we 
have attributed value to leisure, a ban still lies on other courses which 
seem to be more directly in conflict with established attitudes on 
productive efficiency. In a society rationally concerned with its own 
happiness these alternatives have a strong claim to consideration. 


The first of these is that work can be made easier and more pleasant. 

The present-day industrial establishment is a great distance re- 
moved fiom that of the last century or even of twenty-five years ago. 
This improvement has been the result of a variety of forces— govern- 
ment standards and fiictory inspection; general technological and 
architectural advance; the &ct that productivity could be often in- 
creased by substituting machine power for heavy or repetitive manual 
labour; the need to compete for a labour force; and union interven- 
tion to improve workii^ conditions in addition to ws^es and hours. 

However, except where the improvement contributed to increased 



productivity, the effort to make work more pleasant has had to sup- 
port a large burden of proof. It was permissible to seek the elimina- 
tion of hazardous, unsanitary, unhealthful, or otherwise objection- 
able conditions of work. The speed-up might be resisted— to a point. 
But the test was not what was agreeable but what was unhealdiful 
or, at a minimum, excessively fatiguing. The trend toward increased 
leisure is not reprehensible, but we resist vigorously the notion that a 
man should work less hard while on the job. Here older attitudes are 
involved. We arc gravely suspicious of any tendency to expend less 
than the m aximu m effort, for diis has long been a prime economic 

In strict logic there is as much to be said for making work pleasant 
and agreeable as for shortening hours. On the whole it is probably as 
important for a wage-earner to have pleasant working conditions as 
a pleasant home. To a degree, he can escape the latter but not the 
former— though no doubt the line between an agreeable tempo and 
what is flagrant feather-bedding is difficult to draw. Moreover, it is a 
commonplace of the industrial scene that the dreariest and most 
burdensome tasks, requiring as they do a minimum of thought and 
skill, frequently have the largest numbers of takers. The solution to 
this problem lies, as we shall sec presently, in drying up the supply of 
crude manpower at the bottom of the ladder. None the less the basic 
point remains: the case for more leisure is not stronger on purely 
prima facie grounds than the case for making labour-time itself more 
agreeable. The test, it is worth repeating, is not the effect on produc- 
tivity. It is not seriously argued that the shorter work week increases 
productivity— that men produce more in fewer hours than they 
would in more. Rather it is whether fewer hours are always to be 
preferred to more but more pleasant ones. 


The fliird of the obvious possibilities with increasing affluence is for 
fewer people to work. This tendency has also been operating for 
many yean although in a remarkably divene form. Since 1890, when 
one boy in four and one girl in ten between the ages of ten and fifteen 
were gainfully employed, large numben of juveniles have been 


retired from the labour force and their number now is negligible. At 
the same time a large number of women have been added. In 1890 
19*5 per cent of the female population ten years and over was in the 
labour force and by 1953 this proportion had risen to 29*7 per cent.^ 
However, this change reflects in considerable measure the shift of 
tasks— food preparation, clothing manufacture, even cliild-rcaring— 
out of the home. Women who previously performed them have 
gone along to other work. The woman who takes charge of a day 
nursery has joined the labour force, as have the women whose 
children she cares for. 

For seventy-five years the proportion of die male population in the 
labour force lias been constant at around 75 per cent of those over 
ten years of age. There are a smaller percentage of the very young 
and of those over sixty-five, but this has been offset by the increase in 
population in the ages between twenty and sixty-five where the 
proportion of workers to the total is very high.* 

With diminishing marginal urgency of goods it is logical that the 
first to be spared should be old and young. We have yet, however, to 
view this tendency consistently and comprehensively. We are able to 
dispense with the labour of those who have reached retiring age 
because the goods they add are of a low order of urgency, whereas a 
poor society must extract the last ounce of labour e^rt fiom all. But 
we have ordinarily subjected those who retire to a drastic reduction 
in income and living standards. Obviously, if the retirement can be 
af&rded because the product is no longer urgent, a satisfactory- 
meaning for most purposes the customary— living standard can be 
accorded to the retired employee for the same reason. Similarly we 
have excluded youngsters from the labour market, partly on the 
ground that labour at too early an age is unduly painful and injurious 
to health, and pardy to make way for educational opportunity. But 
while we have felt it possible to dispense with the goods that the 
youngsters produce, we have yet to provide them, at least in full and 
satis&ctory measure, with the education that their exemption firom 
labour was designed to make possible. If we are affluent enough to 
dispense with the product of juvenile labour, it again follows that we 
are affluent enough to provide the education that takes its place. 

* America's Needs and Resources, pp. 726^. * Ibid., pp. 725-<S. 



In addition to releasing the old and yonng, it may be that we need 
not use all of the labour force at all times. This possibility was ex- 
plored in Chapter XVU. If the marginal urgency of goods is low, 
then so is the urgency of employing the last man or the last million 
men in the labour force. By allowing ourselves such slack, in turn, 
we reduce the standards of economic performance to a level more 
nearly consonant with the controls available for its management. 
And in so widening the band of what is deemed tolerable perfor- 
mance lies our best hope of minimizing the threat of inflation with its 
further and persistent threat to social balance. 

Such a step requires much more adequate provision than now for 
those who are temporarily unemployed. We have seen, however, 
that such measures are possible and, indeed, have a vital stabilizing 
effect. And again such compensation accords with the logic of the 
situation. If our need for production is of such a low order of urgency 
that we can afford some imemployment in the interest of stability —a 
proposition, incidentally, of impeccably conservative antecedents— 
then we can afford to give those who are imemployed the goods that 
enable them to sustain thdr accustomed standard of Hvii^. If we 
don’t need what the unemployed do not make, we can obviously 
afford them what they customarily eat and wear. 


However, the greatest prospect that we face— indeed what must now 
be coimted one of the central economic goals of our society— is to 
eliminate toil as a required economic institution. This is not a utopian 
vision. We are already well on the way. Only an extraordinarily 
elaborate exercise in social camouflage has kept us from seeing what 
has been happening. 

Nearly all societies at nearly all times have had a leisure dass— a 
class of persons who were exempt from toil. In modem times and 
especially in the United States the leisure class, at least in any identi- 
fiable phenomenon, has disappeared. To be idle is no longer con- 
sidered rewarding or even entirely respectable. 

But we have barely noticed that the leisure dass has been replaced 
by anodier and mudi larger dass to which work has none of the 



older connotation of pain, fatigue, or other mental or physical dis- 
comfort. We have failed to appreciate the emergence of this New 
Class, as it may be simply called, largely as the result of one of the 
oldest and most effective obfuscations in die field of social science. 
This is the effort to assert that all work— physical, mental, artistic, or 
managerial— is essentially the same. 

This effort to proclaim the grand liomogeneity of work has com- 
manded, for different reasons, the support of remarkably numerous 
and diverse groups. To economists it has seemed a harmless and, 
indeed, an indispensable simplification. It has enabled them to deal 
homogeneously widi all of the different kinds of productive effort 
and to elaborate a general theory of wages applying to all who receive 
an income for services. Doubts have arisen from time to time, but 
they have been suppressed or considered to concern special cases.^ 
The identity of all classes of labour is one thing on which capitalist 
and communist doctrine wholly agree. The president of the corpora- 
tion is pleased to think that his handsomely appointed office is the 
scene of the same kind of toil as the assembly line and that only the 
greater demands in talent and intensity justify his wage differential. 
The communist offico-holder cannot afford to have it supposed that 
his labour differs in any significant respect fi:om that of the comrade 
at the lathe or on the collective farm vdth whom he his ideologically 
one. In both societies it serves the democratic conscience of the more 
favoured groups to identify themselves with those who do hard 
physical labour. A lurking sense of guilt over a more pleasant, agree- 
able, and remunerative Ufe can often be assuaged by the observation 
‘I am a worker too* or, more audaciously, by the statement that 
* mental labour is far more taxing than physical labour*. Since the 
man who docs physical labour is intellectually disqualified from 
comparing his toil with that of the brainworker, the proposition is 
uniquely unassailable. 

^ Marshall defined labour as ‘any exertion of mind or body undergone partly or 
wholly with a view to some good other than the pleasure derived directly from the 
work’ {Principles of Economics, p. 65). This definition obviously recognizes a 
category of individuals for whom work is a reward in itself. However, this group, 
having been introduced, plays little or no further part in Marshall’s analysis. It has 
played almost no formal role in economic theory since. 



In fact the differences in what labour means to different people 
could not be greater. For some, and probably a majority, it remains 
a stint to be performed. It may be preferable, especially in the con- 
text of social attitudes toward production, to doing nothing. Never- 
tiieless it is fatiguing or monotonous or, at a minimum, a source of 
no particular pleasure. The reward rests not in the task but in the 

For others work, as it continues to be called, is an entirely different 
matter. It is taken for granted that it will be enjoyable. If it is not, 
this is a source of deep dissatisfaction or frustration. No one regards 
it as remarkable that the advertising man, tycoon, poet, or professor 
who suddenly finds his work unrewarding should seek the counsel of 
a psychiatrist. One insults the business executive or die scientist by 
suggesting that his principal motivation in life is the pay he receives. 
Pay is not unimportant. Among other things it is a prime index of 
prestige. Prcstigc—dic respect, regard, and esteem of others— is in 
turn one of the more important sources of satisfaction associated widi 
this kind of work. But, in general, those who do this kind of work 
expect to contribute their best regardless of compensation. They 
would be disturbed by any suggestion to the contrary.^ 

Such is the labour of the New Class. No aristocrat ever contem- 
plated the loss of feudal privileges with more sorrow than a member 
of this class would regard his descent into ordinary labour where the 
reward was only the pay. In the years following World War II a 
certain number of grade-school teachers left their posts for substan- 
tially higher-paid factory work. The action made headlines because it 
represented an unprecedented desertion of an occupation which was 
assumed to confer the dignity of the New Class. The college pro- 

^ Wc have here an important reason why the income tax, despite high marginal 
rates and frequent warnings of the damage these may do in impairing incentives, 
has so far had no visibly deleterious effect. The surtax rates fall almost entirely on 
members of the New Class. These are people who, by their own claim except when 
they are talking about the effect of income taxes, are not primarily motivated by 
money. Hence die tax, which also does not disturb the prestige structure-people 
are rated by before-tax income— touches no vital incentive. Were high marginal 
rates to be placed on (say) the overtime income of automobile workers, we would 
expect a substantial withdrawal of effort. Here pay, as an incentive, remains 


fessor, who is more securely a member of the New Class than the 
schoolteacher, would never contemplate such a change even as an 
exercise in eccentricity and no matter how inadequate he might 
consider his income. 

In keeping with all past class bdiaviour, the New Class seeks ener- 
getically to perpetuate itself. OflSpring are not expected to plan their 
lives in order to make a large amount of money. (Those who go into 
business arc something of an exception at least partly because income, 
in business, is uniquely an index of prestige.) But from their earliest 
years the children arc carefully indoctrinated in the importance of 
finding an occupation from which they will derive satisfaction— one 
which will involve not toil but enjoyment. One of die principal 
sources of sorrow and frustration in the New Class is the son who 
frils to make the grade— who drops down into some tedious and 
unrewarding occupation. The individual who meets with this mis- 
fortune— the son of the surgeon who becomes a garage hand— is 
regarded by the community with pity not unmixed with horror. But 
the New Class has considerable protective powers. The son of the 
surgeon rarely does become a garage hand. However inadequate, he 
can usually man^c to survive, perhaps somewhat cxiguously, on 
the edge of his caste. And even if, as a salesman or an investment 
counsellor, he finds little pleasure in his work, he will be expected 
to assert the contrary in order to affirm his membership in the New 


The New Class is not exclusive. While virtually no one leaves it, 
thousands Join it every year. Overwhdmingly the qualification is 
education.^ Any individual whose adolescent situation is such that 

^ Political capacity is another qualification, and it is of espedal importance to 
those who seek to make their escape after reachu^ their adult years. TIk intensity 
of the campaigns for local political o£5ces— dty councillors, school committee- 
men, sheriffi, and county supervisors— u to be erqrlained by diis fiurt as also is die 
enduring interest in appointive political office. Ihose who are already members of 
the New Class often ^ to see how such posts are valued as an entr&. Ihey look 
askance at the competition for such posts between die less wdU-educated members 



sufficient time and money are invested in his preparation, and who has 
at least the talents to carry him through the formal academic routine, 
can be a member. There is a hierarchy within the class. The son of the 
factory worker who becomes an electrical engineer is on the lower 
edge; his son who does graduate work and becomes a imiversity 
physicist moves to the higher echelons; but opportunity for education 
is, in either case, die open sesame. 

There can be little question that in the last hundred years, and even 
in die last few decades, the New Class has increased enormously in 
size. In early nineteenth-century England or the United States, ex- 
cluding the leisure class and considering the New Class as a group 
that hved on what it has carefully called earned income, it consisted 
only of a handful of educators and clerics, widi, in addition, a trifling 
number of writers, journalists, and artists. In die United States of the 
eighteen-fifties it could not liave numbered more than a few thou- 
sand individuals. Now the number whose primary identification is 
widi their job, radier than the income it returns, is undoubtedly in 
the milhons. 

Some of the attractiveness of membership in the New Class, to be 
sure, derives from a vicarious feeling of superiority— another mani- 
festation of class attitudes. However, membership in the class un- 
questionably has other and more important rewards. Exemption 
from manual toil; escape from boredom and condning and severe 
routine; the chance to spend one’s life in clean and physically com- 
fortable surroundings; and some opportunity for applying one’s 
thoughts to the day’s work, are regarded as unimportant only by 
those who take diem completely for granted. For these reasons it has 
been possible to expand the New Class gready without visibly 
reducing its attractiveness. 

This being so, there is every reason to conclude that the further 
and rapid expansion of this class should be a major, and perhaps next 
to peaceful survival itself, the major social goal of the society. Since 

of the community. They £ul to realize that such posts provide the greatest oppor- 
tunity for such individuals and that it is upon such people that we depend for much 
good (as well as some bad) dvic enterprise. The union is another important oppor- 
tunity for the individual of political capadty. C£ the interesting sketches by 
Harvey Swados in On the Line (Boston, Atlantic-little, Brown, 1957). 


education is the operative factor in expanding the class, investment 
in education, assessed quaUtatively as well as quantitatively, becomes 
very close to being the basic index of social progress. It enables 
people to realize a dominant aspiration. It is an internally consistent 
course of development. 

Recent experience lias shown that the demand for individuals in 
the occupations generally identified with the New Class increases 
much more proportionately with increased income and well-being. 
Were the expansion of the New Class a deliberate objective of the 
society this, with its emphasis on education and its ultimate edect on 
intellectual, Hterary, cultural, and artistic demands, would greatly 
broaden the opportunities for membership. At the same time the 
shrinking in the number of those who engage in work qua work is 
something to be regarded not alone with equanimity but with posi- 
tive approval. For one of the inevitable outlets for the intellectual 
energies and inventiveness of the New Class wUl be in finding sub- 
stitutes for routine and repetitive manual labour. To die extent that 
such labour is made scarce and more expensive, diis tendency will, of 
course, be accelerated. To minimize the number of people doing 
such work is the counterpart of the goal of expanding the New 

It is a measure of how litde we need worry about the danger firom 
reducing die number of people engaged in work qua work that, as 
matters now stand, our concern is not that we will have too few 
available for toil but too many. We worry lest such technical ad- 
vances as automation, an already realized dividend of the expansion 
of the New Class, will proceed so rapidly as to leave a surplus of 
those who still work. This, indeed, could be the greater danger. 


I venture to suggest that the unprofessional reader will find rather 
reasonable and rational the ideas here ofiered. Why should men 
struggle to maximize income when the price is many dull and dark 
hours of labour? Why especially should they do so as goods become 
more plentiful and less urgent? Why should they not sedt instead to 
maximize the rewards of all the hours of their days? And since tliis is 



the plain and obvious aspiration of a great and growing number of 
the most perceptive people, why should it not be the central goal of 
the society? And now to complete the case, we have a design for 
progress. It is education or, more broadly, investment in human as 
distinct from material capital. 

But in the more sopliisticated levels of the conventional wisdom, 
including, regrettably, some professional economists, any such goal 
will seem exceedingly undesirable. The production of material 
goods, urgent or otherwise, is the accepted measure of our progress, 
hivestment in material capital is our basic engine of progress. Both 
this product and the means for increasing it are measurable and 
tangible. What is measurable is better. To talk of transferring in- 
creasing numbers of people from lives spent mostly in classical toil to 
lives which, for the most part, are spent pleasantly has less quantita- 
tive precision. Since investment in individuals, imlike investment in 
a blast furnace, provides a product tliat can be neither seen nor 
valued, it is inferior. And here the conventional wisdom unleashes 
its epithet of last resort. Since these achievements are not easily 
measured, as a goal they arc ‘fuzzy’. This is vwdely deemed to be a 
fatal condemnation. The precise, to be sure, is usually the old and 
familiar. Because it is old and familiar it has been defined and 
measured. Thus does insistence on precision become another of die 
tautological devices by which the conventional wisdom protects 
itself. Nor should one doubt its power. 

Yet anyone who finds this analysis and tiicse proposals sensible 
should not be entirely discouraged. We are here in one of the con- 
texts where circumstance has marched far beyond the conventional 
wisdom. We have seen how general are the efforts to join the New 
Class and how rapid is its expansion. We are not here establishing a 
new economic and social goal but identifying one that is already 
widely if but tacidy accepted. In this situation the conventional 
wisdom cannot resist indefinitely. The economist of impeccable cre- 
dentials in die conventional wisdom, who believes that there is no 
goal in life of comparable urgency with the maximizadon of total 
and individual real income, would never think of applying such a 
standard to himself. In his own life he is an exponent of all the 
aspirations of the New Class. He educates and indoctrinates his diil- 


dren with but one thing in mind. It is not that they should maximize 
their income. This is abhorrent. He wants above all that they will 
have an occupation that is interesting and rewarding. On this he 
hopes, indeed, that they will take their learned parent as their model. 


On Security and Survival 

In our society die increased production of goods— privately pro- 
duced goods— is, as we have seen, a basic measure of social acliieve- 
ment. This is pardy the result of the great continuity of ideas which 
links the present with a world in whicli production indeed meant 
life. Partly it is a matter of vested interest. Partly it is a product of the 
elaborate obscurantism of the modem theory of consumer need. 
Partly it reflects an erroneous view of the problem of national 
security. And partly, we have seen, the preoccupation with produc- 
tion is forced quite genuinely upon us by tight nexus between 
production and economic security. However, it is a reasonable 
assumption that most people pressed to explain our concern for pro- 
duction— a pressure diat is not often exerted- would be content to 
suggest that it serves die happiness of most men and women. 
That is sufEcient. 

The pursuit of happiness is admirable as a social goal. But the 
notion of happiness lacks philosophical exactitude; there is agreement 
neither on its substance nor its source. We know that it is ‘a profound 
instinctive union with the stream of life\^ but we do not know what 
is united. As just noted, precision in scholarly discourse not only 
serves as an aid in the communication of ideas, but it acts to eliminate 
unwelcome currents of thought, for diese can almost invariably be 
dismissed as imprecise. To have argued simply that our present pre- 
occupation with production of goods does not best aid die pursuit 
of happiness would have got nowhere. The concepts to which 

^ Bertrand Russell, The Conquest of Happiness (London, Allen & Unwin, 1930), 
p. 248. 



one would have been committed would have been far too vague. 

Any direct onslaught on the identification of goods with happiness 
would have had another drawback. Scholarly discourse, hke bull- 
fighting and the classical ballet, has its rules and they must be 
respected. In this arena nothing counts so heavily against a man as to 
be found attacking the values of the public at large and seeking to 
substitute his own. Technically his crime is arrogance. Actually it is 
ignorance of the rules. In any case he is automatically removed from 
the game. In the past this has been a common error of those who have 
speculated on the sanctity of present economic goals— those who 
have sought to score against materialism and PhiHstinism. They have 
advanced their own view of what adds to hmnan happiness. For this 
diey could easily be accused of substituting for the crude economic 
goals of the people at large die more sensitive and refined but 
irrelevant goals of their own. The accusation is fatal. 

Tlie reader will now appreciate die care with which the defences 
against such an attack have been prepared. The question of happiness 
and what adds to it has been evaded, for indeed only mathematicians 
and participants on radio quiz programmes arc required to solve 
problems that can as sensibly be sidestepped. Instead, the present 
argument has been directed to seeing how extensively out present 
preoccupations, most of all that with the production of goods, are 
compelled by tradition and by myth. Released from these compul- 
sions we become free for die first time to survey our other oppor- 
tunities. These at least have a plausible relation to happiness. But it 
will remain with the reader, and ultimately one hopes with the 
democratic process, to reconcile these opportunities with his own 
sense of what makes life better. 


A society has one higher task than to consider its goals, to reflect on 
its pursuit of happiness and harmony and its success in expelling pain, 
tension, sorrow, and the ubiquitous curse of ignorance. It must also, 
so fiur as this may be possible, ensure its own survival. 

The ideas wi^ which this essay is concerned bear heavily on this 
considerable goal. The survival of a society rests on the same fiictors 



which make its survival worth while, for the simple but compelling 
reason that illusion is the enemy of both. 

The point is not difficult to make. Nor, as compared perhaps with 
other things in the book, will persuasion be too difficult. This is 
another area where circumstance— in this instance at almost terrifying 
speed— has been undermining the conventional wisdom. 

More specifically, as this is written (at the end of 1957) it is nearly 
two years since Chapter XII on the economics, so-called, of national 
security was first drafted. At that time it seemed hard to believe that 
people might soon be persuaded that crude increases of production 
had little to do with national defence and that the attitude that 
stressed such calculations was positively damaging. 

Since then the Soviet Union has revealed a breath-taking series of 
scientific and tccluiical advances. No one or at least not many have 
suggested diat she was handicapped in doing so by too small a Gross 
National Product. Tliose who once talked so resonantly of produc- 
tion have been silent, at least on this subject. It has become evident 
that our failure to match this achievement was the result of the &ilure 
to concentrate the requisite resources on the desired ends. Some have 
even pointed out that in the same week the Russians launched the 
fint earth satellite we launched a magnificent selection of car models 
including the imiquely elegant new Edscl. The lesson was not com- 
pletely learned. Too much was attributed to fortuitous factors— 
unwise budget cuts, the perverse personality of the Secretary of 
Defence, interscrvice conflict, and generally poor administration. 
We have not yet seen that the causes were far deeper— that our 
economy, and the economic theory that explains and rationalizes its 
behaviour, immobilizes all but a minor fraction of the product in 
private and, fi:om the standpoint of national security, irrelevant pro- 
duction. We have not seen that the problem is far more dian one of a 
bigger budget— that it is one of our attitude toward the goals of the 
society itself. A society which sets as its highest goal the production 
of private consumer goods will continue to reflect such attitudes in all 
its public decisions. It wiU entrust public decisions to men who regard 
any other goal as incredible— or radical. We have yet to see that not 
the total of resources but their studied and rational use is the key to 



There would seem to me even a likelihood that one branch of the 
conventional wisdom will react to arguments such as those here 
advanced by saying that they are inappropriate in a world of tension. 
Production, it will be said, is still our problem— and how much 
more so in the cold war. It will be said, in effect, that we must con- 
tinue to avoid any reflection on what we are producing. The urgency 
of our situation requires that we remain blind. To contemplate what 
might better our happiness would be a diversion. We must continue 
to expend our energies on what does not. To reflect on the relation 
of our resource use to security and survival would take our minds 
away from producing what we do not urgently need. 


The nature of the deployment of the resources that would best serve 
our survival is beyond die scope of this essay. For myself I have little 
fliith in the safety or security which derives from a never-ending 
arms race— from a competition to elaborate ever more agonizing 
weapons and to counter those of the enemy. If the possibility exists, 
the risks of negotiation and setdement, however great these may be, 
would still seem to provide a better prospect for survival than reli- 
ance on weapons which we can only hope are too terrible to use. 

But whatever the paths to survival, the problem is the same. Were 
the Russians to disappear from the world, or become overnight as 
tractable as church mice, there would remain vast millions of hungry 
and discontented people in the world. Without the promise of relief 
from that hunger and ptivadon, disorder would still be inevitable. 
The promise of such relief requires that we have available or useable 
resources. The requirement is, of course, much more urgent in a 
world in which diflering economic and political systems are in com- 

Even when the arms race ends, as it must, the scientific and techno- 
logical frontier will remain. Either as an aspect of international com- 
petition, or in pursuit of the esteem and satisfliction which go widi 
discovery, we shall want to seek to cross it and be in on the crossing. 
In the field of consumer satisfretion, as we should by now agree, 
thore is Utde on which one can fiiult the American performance. But 


this is not all and, as we should now, hopefully, also agree, an eco- 
nomy that is preoccupied however brilliantly with the production of 
private consumer products is supremely ill fitted for many of these 
frontier tasks. Under the best of circumstances its research will be 
related to these products rather than to knowledge. The conven- 
tional wisdom will provide impressive arguments to the contrary. 
No one should be fooled. 

And not only does a great part of modem scientifre work lie out- 
side the scope of the market and private enterprise but so does a 
large area of application and development. Private enterprise did not 
get us atomic energy. It has shown relatively slight interest in its 
development for power for the reason that it could not clearly be 
fitted into commercial patterns of cost and profit. Though no one 
doubts the vigour with which it addresses itself to travel within the 
United States, General Motors has little interest in travel through 

As matters now stand, we have almost no institutions that are by 
central design and purpose directed to participation in modem 
scientific and technological progress and its large-scale application. 
We have no organization capable, for example, of taking on the 
large-scale development of atomic power generators or radically 
new departures in passenger-carrying aircraft in advance of know- 
ledge that these will be commercially feasible. Much has been accom- 
plished by research and development, not immediately subject to 
commercial criteria, under die inspiration of military need. This has 
done more to save us from the partial technological stagnation that is 
inherent in a consumers’ goods economy than we imagine. But it is 
also a narrow and perilous prop, and it has die further effect of 
associating great and exciting scientific advances widi an atmosphere 
of fear and even terror. 


Nor is this all. The day will not soon come when the problems of 
eidier the world or our own polity are solved. Since we do not know 
the shape of the problems we do not know the requirements fr>r 
solution. But one diing is tolerably certain. Whether the problem be 



that of burgeoning population and of space in which to live with 
peace and grace, or whether it be the depletion of the materials 
which nature has stocked in the earth's crust and which have been 
drawn upon more heavily in this century than in all previous time 
together, or whether it be that of occupying minds no longer com- 
mitted to the stockpiling of consumer goods, the basic demand on 
America will be on its resources of abiHty, intelligence, and educa- 
tion. The test will be less the effectiveness of our material investment 
than the effectiveness of our investment in men. We live in a day of 
grandiose generaUzation. This one can be made with confidence. 

Education, no less than national defence or foreign assistance, is in 
the pubhc domain. It is subject to the impediments to resource 
allocation between private and public use. So, once again, our hope 
for survival, security, and contentment returns us to the problem of 
guiding resources to tlic most urgent ends. 

To furnish a barren room is one thing. To continue to crowd in 
furniture until the fotmdation buckles is quite another. To have 
failed to solve the problem of producing goods would have been to 
continue man in his oldest and most grievous misfortune. But to fail 
to see that we have solved it and to fail to proceed thence to the next 
task would be fully as tragic. 


A.A.F., 128 

Abramovitz, Moses, 98 n. 

Affluence, and economic preoccupa- 
tions, 61; economic security, 85; 
employment, 227; in Europe, 1-2, 
26; ideas, 1-3, 112; inflation, 185, 194; 
problems of, 226, 256; in United 
States, 1-2, 26, 47-8; want creation, 
124, 194. See also Wealtli 

Affluent society, and depression, 236-7; 
income, 256; sales tax, 245-7; social 
balance, 199-201, 250; work, 260-2 

Agriculture, in Appalacliians, 254 n.; 
in Canada, 89; farm income, 253-4; 
and Keynes, 147; poverty of, 252-3; 
prices in depression, 35, 88; and pure 
competition, 167; research in, 9c>-ioo; 
support prices, 82, 86, 89, 92; sur- 
pluses, 220; in United States, 89, 114; 
universal risk insurance, 89. See abo 

Agriculture, Department of, 205 

Alcott, William A., 225 n. 

Aldrich, Winthrop, 72 

American Assembly, 14 

American Farm Economic Associa- 
tion, 88 n. 

American Revolution, 20 n. 

Americans for Democratic Action, 96, 
150; ADA World, 149 n. 

Antitrust laws, 75, 103, 169 n. 

Appalachians, 253, 254 n. 

Arkwright, Richard, 211 

Asia, 21, 26 
Assassins, 69-70 
Australia, 26 

Automobile instalment credit 1955-6, 


Bank of England, 176-7 
Bank rate, 176; in Britain, 176-7 
Batten, Barton, Durstine and Osborn, 

Beckerman, W., 109 
Beecher, Henry Ward, 45 
Bellamy, Edward, 40 
Bengal, 245 
Benson, Ezra Taft, 221 
Bentham, Jeremy, 224 
Beveridge, William (Lord), 11 
Bierce, Ambrose, 256 
Blough, Roger, 75 n. 

Boumeuf, Alice, 64 n. 

Brandt, Karl, 88-9 
Bricker, John W., 145 
Brown, E. H. Phelps, 16 n. 

Browning, Robert, 151 
Budget, balanced, 11-13, 148; cutting, 
188; deficit, 53 ; in depressions, 11-13 ; 
surplus, 186-7 
Built-in stabilizers, 92 
Bums, Arthur F., 208 n. 

Business, borrowing, 160, 180, 181, 
233, 183; in depression, 87; economic 
security, 78-83, 86-7; inflation, 172-4 
206; monetary policy, 183-4, 186; 
New Class, 266-7; research, 99-100; 



Veblen, 41. See also Investment 
Business cyde, 34-6, 52 n., 82-3, 147-8, 
190, 231-2 
Business Week, 152 

Businessman, and conventional wis- 
dom, 8, 9; in depressions, 35; as eco- 
nomic force, 6, 73; vs. economists, 
75; and equality, 65; European vs. 
American, 88; hostility to govern- 
ment, 144; and intellectuals, 144-6, 
152-3; in modem corporation, 69- 
70; and prestige, 151-3; and prices, 
170; and production, 96, 142-6, 151, 
153, 154; and public officials, 152; 
and social security, 78, 81; and taxes, 
63, 151; in Washington, 133-4, ^3^ 

Cairncs, J. F., 18 n. 

California, real estate speculation in, 

Canada, 85, 89 
Cannes, 72 

Capital, free flow of, 212; material, 
210, 212-13, 216, 269-70; personal, 
210, 212-14, 216, 248, 269-70 
Capital formation, 62, 63-4, 107; de- 
fined, 210; in England, 63, 102; 
Norway, 63; as index of economic 
growth, loo-ioi 
Capital gains, 66, 245 
Capitalism, 89; Marx’s views of, 50-1, 
56, 89 

Carey, Henry Charles, 37-8, 40 n., 

Carlyle, Thomas, 20 
Carnegie, Andrew, 29, 152 
Carnegie Corporation, xi 
Carney, Stephen}., 143 
Cartels, 79 
C.G.C., 232-39 
ChcvalHcr, Gabriel, 153 
Chicago, 96, 259 
China, 74 


Churchill, Sir Winston, 58 n., 149 
CIO, 6 

Civil War, 16, 29, 33 
Clark, John Bates, 113 
Class conflict, 54, 55 
Clcmence, Richard V., 35 n. 
Clochemerle, 153 
Coefficients, 197 

Commager, Henry Stcclc, 42 n. 
Commons, Jolm R., 40 n. 
Communism, 14, 62, 129, 265 
Communist party, 96; and inflation, 207 
Competition, 30-3, 165, 16711., 169-71, 
187; in Britain, 176; insecurity of 
competitive model, 59-60, 77, 79-84; 
pure, 167; Social Darwinism, 47-9 
Congress, 14, 162, 177, 188, 204 
Connecticut, 254 

Conservatives, and balanced budget, 
148; full employment, 150; and 
government, 148; inequality, 203-4, 
244; inflation, 164, 165, 189; mone- 
tary policy, 186, 194; production, 76, 
194; security, 78, 83; taxes, 65, 189, 
204, 244, 245, 248-9 
Consumer borrowing, 180, 18 1 
Consumer credit, 158-60, 162-3, 180-1; 
in United Kingdom, 162; in United 
States, 162 

Consumer debt, and CGC, 237; crea- 
tion of, 156, 159-60, 217; dangers of, 
158-61, 162; increase in, 156-7, 162; 
view of, 156 

Consumer demand, 117; and debt, 155, 
162; interest rate, 180; production, 
120-2; theory of, 112-13, 124-5, 
142, 151, 154; unsolved problem, 194 
Consumer need, theory of, 272 
Consumer saving, 158, 179 n. 
Consumer spending, 160, 184; and 
fiscal poUcy, 190; and inflation, 181; 
in Korean war, 136-7; and mone- 
tary policy, 181 

28 o 


Consumer want creation. See Depen- 
dence effcrt, Want creation 
Controlled Materials Plan, 134 
Conventional wisdom, 6, 14-15, 125, 
226; balanced budget, 11-13, 148; 
and business executive, 8, 9; civilian 
morale, 134-5; constructive criticism, 
218; and consumer borrowing, 159; 
consumer demand, 1 19-20, 123; and 
controls, 238-9; depressions, 166; 
and events, 10, 13, 15, 178; federal 
appropriations, 204; Federal Re- 
serve, 177; and fiscal policy, 190; and 
inequality, 64, 65-6, 76; inflation, 
165; international affairs, 128; and 
Keynes, 118, 149-51; of liberals and 
conservatives, 6-7; of Marxists, 58; 
and military policy, 128-31, 134-6, 
139; and monetary policy, 178, 185; 
and production, 76, 89-91, 96, 99, 
105, no, 131, 135, 2I9~2I, 229, 274, 
276; and the public official, 8-9; 
public services, 106, 202-3; and re- 
search, 216; scholarship, 7-9; security, 
77-9, 85. 87-90, 92-3, 156; and 
stable prices, 164; structure of in- 
centives, 174; and survival, 274, 275; 
taxes, 243, 248-9; technological 
advance, 21 1; work, 261, 270 
Corporation, 47, 56, 88, 91, 102, 167-8, 
222, 223-4; business executive in, 
I43f 152-3; and depression, 154; 
monetary policy, 183-4; and organi- 
zation man, 208-9; prices, 81-2, 
169-70, 183; regulation of, 147-8; 
and research, 99 

Countervailing power, 31 n., 167 n. 
Croffiit, W. A., 71 n. 

Cyclically Graduated Compensation. 
See C.G.C. 

Darwin, Charles, 44 
Deauville, 72 

Defence, Department of, 137 
Delmonico’s, 45 

Demand, and C.G.C., 231; controls, 
191; fiscal policy, 187, 190-2; in- 
flation control, 175; private goods, 


Democrats, 95, 96, 149 
Dependence effect, 124, 135; defini- 
tion of, 124; and production, 125; 
public services, 202 
Depew, Chauncey, 46 
Depiction allowance, 66, 245 
Depression, 11-12, 33-6, 39-40, 41, 
51-2, 55, 57t 59, 82-3, 85, 103. 107, 
147, 165, 206, 220, 227, 229-30, 232; 
and C.G.C., 237; economic security, 
loi, 154; inefficiency of, 87, 90-2, 
loi; and monetary policy, 185; 
public services, 207; as sclfcorrcct- 
ing, 165; and taxes, 188. See also 
Great Depression 
Destutt dc Tracy, A., 51 
Dewhurst, J. Frederic, 90 n., 260 n., 
263 n. 

Diaspora, 224 

Direct controls, 192-3. See also Prices, 

Dorfinan, J., 38 n. 

Douglas, Lewis W., 13 
Duesenberry, James S., 121 
Du Pont (E. I du Pont dc Nemours 
and Company), 208 

East India Company, 21 
Economic security, and consumer 
credit, 162; inflation, 166, 175; mone- 
tary policy, 183 ; preoccupation with, 
87-8; production, 88-91, 93, 151, 
154-6; in thirties, 83 
Economic stabilization, 170 n.; as 
public policy, 82 

Economics, American tradition in, 37; 
central tradition, 18, 25, 27-8, 30, 32, 

INDEX 281 

33-4* 35t 37* 58-60, 61-2, 78-9; Governors of, 66 n., 161; relation to 

current problems, 111-12, 118, 251; 
defence of production, 110-12; “Dis- 
mal Science,’’ 20; formation of ideas 
17-18; history of, 18-58; mterpreu- 
tion of behaviour, 5-6; obsolescence of 
central ideas, 3; preoccupation with 
productivity, inequality, and inse- 
curity, 60; wealth of national com- 
munities, 16 
Eden, Sir Anthony, 149 
Edsel, 274 

Education, 277; investment in, 269. 

See also Social Balance 
Eisenhower, Dwight David, 65 
Eisenhower Administration, 144, 149 
Employment, as basic economic con- 
cern, 227; level of, 244 n.; See also 
Full employment. Unemployment 
England, economic conditions, 16, 17, 
18, 20, 24-5, 70; economic discus- 
sion, 26; housing, 201; Industrial 
Revolution, 211; of Marshall, 251; 
and New Class, 268; public wages, 
206; rate of capital formation, 63; 
Ricardo, 114; Social Darwinism, 44; 
social legislation, 45; Stuarts, 242 
Excise tax, 204 

Factory Acts, 11 
Fair Trade laws, 81 

Farmers, aid to, 147, 162; in com- 
petitive market, 169-70, 183; in- 
come in fifties, 68; and inflation, 172; 
monetary policy, 183; production, 
225; security, 80, 81, 84, 85, 86-9, 
1 54; See ako Agriculture 
F.B.L, 264 

Federal government, and defence, 
243; inflation, 205-6; social balance, 
205-6, 243. 245; taxes, 204-5, 243- 

Federal Reserve System, Board of 

government, 177 
Feudalism, 24, 100, 266 
Fiscal policy, 186, 194; consumer 
spending, 190; income inequality, 
189; inflation, 187, 194; investment, 

190- 1; market structure, 187; politics, 

191- 2; prices, 186, 191-2; production, 
189-91; unemployment, 190; wages, 

Florida, 91 

Ford, Henry, 84, 152, 210 
Ford Motor Company, 84 
Forsytes, 86 

France, 206, 246; French army, 128 
Franklin, Benjamin, 211 
Freemarket, controls, 192-3; inflation, 

166, 174-5 

Free trade, in Britain, 176 
Full employment, 149-50, 191, 194, 
220, 227, 229-34. 235-6, 238; defini- 
tion of, 167 n.; as norm, 190; price 
stability, 174 

Galbraith, Catherine A., xi 
Galbraith, John Kenneth, 31 n., 33 n., 
167 n., 170 n., 258 n. 

General Electric Company, 47, 81 
General Motors Corporation, 9, 47, 
81, 137* 276 

General Property Tax 205, 246 
Genghis Khan, 17 
George, Henry, 38-40 
Germany, 17, 126-8, 130 n., 219; 

social insurance in, 85 
Goering, Hermann, 126 
Goldsmith, Selma, 67 n. 

Gorer, Geoffrey, 96 n. 

Gould, Jay, 71 

Gray, Alexander, 21 n., 38 n. 

Great Britain, and bank rate, 176-7; 
liberalism, 146; production, 19th 
century, 102; social insuiance, 85; 



unemployment, 93 ; war produc- 
tion, 128 n. See also England 
Great Depression, 33-7, 42, 56, 71, 147; 
and agriculture, 220; balanced bud- 
get, 12-13; government interven- 
tion, 165-6; monetary policy, 177; 
security, 85-6; in United States and 
Canada, 85 

Gross National Product, 91, 95, 104-5, 
129, 130, 136, 196. 199. 274 
Guggenheim Foundation, John Simon 
Guggenheim Memorial Foundation, 

Haileybury College, 21 
Hamburg, 126-7, 128, 131, 124 
Hamilton, Alexander, ii 
Hamlet, 171 
Hansen, A. H., 160 n. 

Harberger, Arnold C., loi n. 
Hargreaves, James, 211 
Harriman, Avercll, 72 
Harriman, £. H., 69 
Harris, Seymour £., xi-xii, 104 n. 
Harvard University, xi, 28 
Hayek, F. A., 208 n. 

Haynes Foundation, California Insti- 
tute of Technology, xi 
Hcarst, William Randolph, 69 
Henry of Champagne, 69 
Hill, James J., 69 
Hiroshima, 126 
Hitler, Adolf, 126 
Hofstadter, Ridiard, 45 n., 46 n. 
Holland, 16, 201 
Hollywood, 152, 200 
Holmes, Justice Oliver Wendell, 

Honolulu, 173-4 
Hoover, Herbert, 12, 13, 147 
Hopkins, Sheila, V. 16 n. 

Hottentots, 221 

Housing, and social balance, 200-1 

Hiunan development, external eco- 
nomy of, 213-14; See also Invest- 
ment, New Class 

Humphrey, George M., 53 n., 181-2, 

Imperialism, Marxian view, 54 

Income, in affluent society, 257; agri- 
cultural, 68, 253; as basic economic 
concern, 227; and C.G.C., 237; in 
fifties, 66, 157-8, 252-3; in inflation, 
205-7; and liberty, 261; and New 
Class, 266, 269, 271; for 1928 to 1950. 
67; from private goods, 241-2; and 
production, 227-8, and public acti- 
vity, 241-2; redistribution of, 61, 
74-5, 147; and Ricardo, 22; rise in 
vs. inequality, 68, 70; and tax policy, 
64-5; in 20tii century, 75 n. 

Income tax, 62-6, 75, 147, 162, 189, 
203-4, 223, 243-5, 247-9 

India, 72, 74. 84, i97. 246, 259 

Industrial Revolution, 17, 85, 21 1 

Industry, conversion to war, 128; in 
United States, 211; in World War 
I, 130 n. 

Inequality, 59-60, 244-5, 256; case for, 
62-3, as economic issue, 64-8, 143, 
203; in economic tradition, 61-2; 
and income tax, 62, 66, 203-4, 244; 
preoccupation with, 60-1; and social 
balance, 203-4 

Inflation, 218; consequences of, 173; 
control of, 174-5. 178-9. I94. 238; 
and countervailing power, 167 n.; 
dangers, 194, 228; and expenditures, 
187-9; farmers, 172; fis^ policy, 
187-9, 194; and income, 171 n., 

205- 7; investment, 182; Korean war, 
136-7; monetary policy, 166, 179, 
181-3, 194; and production, 155-^. 
167-8, 182; public employment, 

206- 7; public services, 187-8; reme- 

INDEX 283 

dies for, 165-6, 168, 174, 193, 194; 
responsibility for, 172; and social 
balance, 203, 205-6, 228, 237; taxes, 
187-8, 191; unemployment com- 
pensation, 231; and unions, 172, 174; 
in United States, 164; and wages, 
i 69 - 7 I» 174-5 

Inland Steel Company, 88 n. 
Input-output, 197 

Interest rate, 176, 178, 179-81, 182-4 
International trade, 33-4 
Investment, by business, 160, 180, 
181-5, 190; in education, 269-70; 
funds, 212; in individuals, 212-16, 
248, 257-9, 269-70, 277; in material 
capital, 269-70, 277; in public do- 
main, 213-16; rate of, 160 
Iowa, 85 

Iron law of wages, 19-20, 22-3, 26-7, 


Italy, 206 

Jaszi, George, 67 n. 
jevons, William Stanley, 173 
Johnson, Gale, 75 n. 

Johnson, Dr. Samuel, 58 
Joint Committee on the Economic 
Report, 91 n. 

Josephson, Matthew, 71 n. 

Juvenile delinquency, 200 

Kaitz, Hyman, 67 n. 

Kay, John, 211 
Kaysen, Carl, xi, 104 n. 

Kendrick, Jolin W., 98 n. 

Kent, James, ii 
Kentucky, 85 

Keynes, John Maynard (Lord), 13, 15, 
16 n., 18 n., 83, 118, 120, 147, 149- 
51, 165, 178, 186, 194, 220 
Korean war, 136-7 

Labour, 167; limiting production in 

American economy, 100; natural 
price of, 23 ; Vcblcn, 40-1 
Labour force, 167, 169, 229-31, 234-6, 
237, 262-4, 337-39 

Labour productivity, 196; data on, 89-90 

Labour party, in Britain, 149 

La Follette, Robert, ii 

Lake States, 253 

Lawrence, 223 

Lelunan, Herbert, 72 

Lend Lease, 133 n. 

Leontief, Wassily, 197 
Liberalism, in Britain and United 
States, 1 90-1; concept of liberal 
state, lo-ii, 19; conventional wis- 
dom, 7, ii; liberal economic society, 
24, 105 

Liberals, and economic security, 83, 
employment, 149-50, 191; expand- 
ing economy as goal, 76; fiscal 
policy, 186, 189, 191, 194; inequality, 
63-4; inflation, 164-5, I9i; poverty, 
255-6; production, 146-51, 194; 
programme in America, 146-8; 
public services, 207; social balance, 
203, 243-5; social security in U.S., 
78; taxes, 65, 204, 244-7, 248-9 
liebenberg, Maurice, 67 n. 

Little, I. D. M., 113 n. 

Lloyd, Henry Demarest, 40 
Lloyd, George David, ii 
Locker, v. New York, 45 n. 

Los Angeles, 96, I15. I 35 . I 99 
Lowell, 223 

LudendorflT, Erich, 130 n. 

Lynes, Russell, 152 n. 

Macmillan, Harold, 149 
M. A. Hanna Company, 137 
Madison Avenue, 200, 242 
Maginot Line, 128 

Malthus, Thomas Robert, 20 - 4 » 26, 33, 
43, 84, 102 



Marginal cost, 167 n. 

Marginal productivity theory, 27, 29, 

Marginal utility, 115-16; doctrine of 
diminishing, 114-15, 118 
Market behaviour, theory of, 86 
Marshall, Alfred, 27, 28, 30, 32, 115, 
251, 252, 265 n. 

Martin, Bradley, 45 
Marx, Karl, 19, 20, 25, 33, 34. 38. 42, 
50-60. 89, 105, 

Marxians (Marxists), 19, 53, 55-8, 60, 
62, 64, 66, 89, 

Materialism, 55, 350 
Maytag, Fred 11 , 63 n., 65 n. 

Mazur, Paul, 159 n. 

Menger, Karl, 113 
Mercantilism, 24 
Miami Beach, 72 

Middle Bast, 74; display of wealth, 72; 
economic life, 17; rate of capital 
formation, 64 

Mill, John Stuart, 18 il, 24, 27, 37 
Mills, C. Wright, 71 n. 

Mises, Ludwig von, 145 n. 

Mississippi River, 253 
Mitchell, Wesley C., 35, 40 n. 
Mohammed, 50 

Monetary policy, 176; agriculture, 183; 
bank borrowing, 180; of bankers, 
177-8; business investment, 181-4, 
i93-4> 208; competitive market, 
183-4, 187; consequences of, 184-5; 
consumer borrowing and spendii^, 
180-2; definition of, 166; economic 
security, 183, 185; Great Depression, 
177; inflation, 179-80, 183, 194; 
interest rate, 179-81, 182-3; large 
and small firms, 183-4, 187; mystery 
of, 177; prices, 181, 183-4, 185; pro- 
duction, 181-3; revival of; 17^; 
supply of money, 179-80; wage- 
price interaction, 179 

Money supply, 179-80 
Monopoly, 30, 32, 41, 79, 101-2 
Morgan,}. Pierpont, 69, 71, 72, 152 
Munoz-Marin, Governor Luis, xii 

Napoleon, time of, 129 
The Nation, 42 

National Association of Manidfacturers, 
47. 57. 63 n., 96, 150, 249 
National Bureau of Economic Rc- 
seardi, 67 n., 98 n. 

National defence, 277; and produc- 
tion, 151. 154. 273-4; taxes, 243 
New Class, 265, 266-71 
New Deal, 43, 71, 83, 133, 221 
The New Republic, 42, 129 n. 

New York City, 45, 133, 195 
New York state, labour legislation, 45 
New Zealand, 26 
Newport, Rliode Island, 45 
Nice, 72 

Nixon, Richard M., 237 
North Dakota, 225 
Norway, capital formation in 63-4 
Nutter, G. Warren, 21 1 n. 

Old age and survivor’s insurance, 92 
Olds, R. E., 152 

Ohgopoly, 167 n., 168, 171, 172, 174, 
183. 184, 187 
Ozarks, 253 

Palais des Nations, xi 
Palm Beach, 72 
Pampas, 26 
Pangloss, Dr., 56 
Panic of 1907, 33 
Parker, Cola G., 47 
Parks, Ruth M., xi 
Parliament, 241; acts of, 19 
Patten, Simon N., 40 n. 

Philistinism, 273 
Pigou, A. C., z6o n. 


Pitt, William, 259 
Poland, 197 
Poor Laws, 43 

Population, theory of; Malthus, 20-2, 
26; Ricardo, 22-3 

Poverty, in Asia, 21; elmunation of, 
257-9; inequality, 39-41, 59; man’s 
normal lot, 1-2; in Marshall’s day, 
251-2; minimum income, 256-7; 
political economy, of 255; produc- 
tion, 76, 220, 252, 255-6, 259; in 
public services, 195; root of economic 
attitudes, 3, 4; Social Darwinism, 
45-6; today, 253-5, 259; in West, 4 
Poverty, case, 253-4, 255, 258 
Poverty, insular, 254-5 
Price control, 79, 82, 137, 175, 192-4, 

Prices, 87, 198; administered, 169, 170; 
bank rate, 176; business cycle, 82; 
C.G.C., 236, 237; in competitive 
industries, 169-71, 187 n.; in com- 
petitive market, 174, 183-4; deter- 
mination, 1 13; discrimination, 82; 
farmers, 35, 82-3, 86, 88, 89, 92; 
fiscal policy, 187, 190-2; interest rate, 
179 n.; monetary policy, 179, 182, 
183, 185; money supply, 180; mono- 
poly, loi; in 19th century, 165; 
oligopoly, 168, 171, I74f 183; in 
peacetime, 165; setting by business, 
79-80, 81, 167-8; Steel industry, 171; 
wages, 171, i74-5t 192, 231; since 
World War 11, 164. See also Inflation 
Privately produced goods, balance in, 
197-201, 240; vs. pubh'c services, 
104-8, 139, 163, 195-7. 207-8, 210, 
241; sales tax, 245-6; wealth of, 


Production; 59, 195, 218-20, 221-2, 
225-6, 238, 248, 259, 260-1, 264, 
225-6, 272, 274, 276; balance in, 197. 
203; business executive, 142-4, 146; 


conservatives, 76, 154; consumer 
debt, 157-8, 162-3, 216-17; con- 
sumer wants, 120-5, 131; controls, 
192-3; dependence effect, 124, 125, 
132; diminishing marginal utility, 
1 1 3-17; economic growth, 210; 
economic security, 88-91, 92-3, loi, 
154-5, 232; economic theory, iio-ii, 
124; education, 216; excess, 97; fiscal 
policy, 189-91; in Hamburg, 126-8; 
happiness, 273; importance of, 96, 
120, 153; income, 74-6, 109, 227-8, 
241-2; inequality, 62; inflation, 167- 
168, 175; interrelation of products, 
197-8; Keynes, 147; labour force, 
98, 100, 103, 155, 167; liberals 146- 
151, 154; loss of, 91-3, loi, 103, 107, 
147; military power, 136-9, 154; 
monetary policy, 181-3; national 
security, 151, 154, 273-4; in peace, 
103, 107, 131. 134; politics, 148, 155; 
poverty, 259; preoccupation with, 
93-4. 97. 102-3, 108, 109, 151; 
prestige of goods, 151, 154-5. I97; 
private goods and public services, 
104-8, 139, 163, 195-203, 207; re- 
search, 100, 214-16; sales tax, 249; 
social balance, 200, 203-4, 216, 259; 
social security, 158; unemployment, 
93. 155, 229-30; in war, 103, 131-4, 
136-8, 148; ways to increase, 98-9, 
103, 107, 147. See also Gross National 

Profit, and price regulation, 79-80; 
rate of, 57; Ricardo, 22 

Proust, Marcel, 152 

Public services and advertising, 203, 
209; attack on, 207-9; consumer 
debt, 163; cost of, 207; federal ap- 
propriations for, 204; housing, 201; 
inflation, 188, 207; poverty in, i95-<5. 
240; private goods, 195-6, 198-9. 
207, 2X0, 241; production, 162-3; 



prosperity, 201-2, 250; social balance, 
198, 199, 200, 203, 207-8, 240, 244-6; 
taxes, 207 

Public spending, 53, 160, 162, 188; and 
fiscal policy, 186-7; Keynes, 147; 
socialism, 106; unemployment, 186 
Public welfare payments, 92 
Public worker, and inflation, 205-6 
Public works, 52 
Pure competition, 167 
Puritan ethos, 224, 233; modem 
merchandising, 156 

Radio Corporation of America, 9 
R.A.F. Bomber Command, 126, 

Randall, Clarence B., 10 n., 88 n. 
Recession, 34 
Rembrandt, 70 
Republicans, 95, 237 
Resources, 277; human, 212-16, 245, 
248; for public use, 249 
Ricardo, David, 20-6, 27-30, 36-40, 
41. 43. 49. 50, 53. 61-2, 74. 84. 94. 
96, 114, 125, 153 
Robinson, Joan, 52 n., 57 n. 
Robinson-Patman Act, 81 
Rockefeller, Jolin D., 29, 46 
Rolling readjustment, 34 
Roosevelt, Franklin Delano, ii, 13, 43, 
147, 148 n. 

Roosevelt Administration and bal- 
anced budget, 13; New Deal, 43, 71, 
83, 133, 221 
Ruskin, John, 50 
Russell, Bertrand, 272 n. 

Russia, 112, 128, 275; technological 
advance in, 100, 137 n., 213 n., 274 

Sales tax, 204, 245-9, 251 
Salter, Sir Arthur, 56 
Samuelson, Paul A., 117 n., 192 n. 
Sarasota, 96 

Scandinavia, housing, 201; social in- 
surance, 85 

Schlesinger, Arthur M. Jr., xi, 13 n. 
Schumpeter, Joseph A., 35, 52 n., 55 n., 
57 n. 

Scientific research, 214, 276. See also 
Technological advance 
Secretary of Defence, 274 
S^, Henri, 11 n. 

Sismondi, Leonard, 51 
Smith, Adam, ii, 18-20, 21, 23, 24, 27, 
37. 39. 51. 56, 113 

Social balance, 198-203, 210, 240, 249; 
and Congress, 204; in consumption, 
216-17; definition of, 198; depen- 
dence eflect, 202; education, 217, 
245; federal government, 204-5, 208, 
243; housing industry, 200-201; 
inequality, 203; inflation, 203, 205-6, 
228; investment in people, 258; local 
governments, 205, 245; Los Angeles, 
199; produaion, 200, 203-4; pros- 
perity, 247, 250; taxes, 203-5, 243-8 
Social Darwinism, 43-50, 59 
Social insurance, ii; old age, 78, 81, 92; 

unemployment, 78, 81 
Social security, 78, 81, 147, 162, 186 n., 
216, 228 

Socialism, 34, 50, 106, 152, T58 
Soil bank, 221 
Solomon, Robert, 170 n. 

South America, 72, 74, 206 
Soviet Union. See Russia 
Spencer, Herbert, 44-7 
Sraffa, Piero, 22 n. 

Standard Oil Company, 29, 46 
Stigler, G. J., 29 
Stock market, 34, 80 
Strachey, John, 56, 57 n. 

Stuarts, 242 
Subsidies, 102 

Sumner, William Graham, 45, 46, 47 
Supreme Court, 45 


Survival, 273-5 

Sutton, Francis X., 104 n., 144 n. 
Swados, Harvey, 268 n. 

Sweezy, Alan, xi 
Swigert, Ernest L., 63 n. 

Switzerland, 130 

Tariffs, 75, 79. 101-2 
Taussig, Frank W,, 28, 30 
Tawncy, R. H., 62, 96, 195 
Taxes, 64-^, 186, 205-6, 208, 222, 
241-3, 246; capital gains, 66, 244-5; 
consumer debt, 162; depletion allow- 
ance, 66, 245; distribution of income, 
64, 66, 189; equality, 64-7, 189; by 
federal government, 204-5; govern- 
ment spending, 148; inflation, 178-9, 
246; production, 109; public ser- 
vices, 207, 242; salt tax, 246-7; social 
balance, 203, 205, 243-4; in states and 
locally, 205, 245-6. See also General 
Property tax. Income tax. Sales tax 
Technological advance, 107, 146, 210, 
276; investment in, 99, 21 1, 248, 
276-7; in modem industry, 211-12; 
19th century, 211; in peace, 103; in 
war, 103 
Tennessee, 85 
Tennessee Valley, 255 
Third Reich, 127 
Thirty Years’ War, 17, 126 
Tobin, James, 104 n. 

Trade associations, 81 
Trade unions, 6, 11, 27, 32, 41, 45, 69, 
75, 80, 81, 88, 91. loi, no, 147. 167 n. 
169, 190, 222, 230, 234-5. ^38. 256, 
268 n.; and inflation, 172; wage in- 
creases, 172, 173 

Treasury, Department of the, 137 

Unemployment, 91, 158, 193, 236-7; 
automobile industry, 159; C.G.C., 
231-7; federal responsibility, 233, 


234; fiscal policy, 190, 236-7; Great 
Depression, 147; inflation, 174; in- 
surance, 88; Keynes, 165, 186; as 
political issue, 93 

Unemployment compensation, 89, 92, 
228-35, 264; payments in 1956, 

United States, affluence in, 48, 251; 
agriculture, 89; inequality as econo- 
mic issue, 64; national output, 98; 
New Class, 268; poverty, 259; Presi- 
dent of, 143; production, 89-90; 
social legislation, 45; taxation, 246-7; 
wages, 20-1, 26, 205-6 
United States Chamber of Commerce, 
6, 96 

United States Department of Com- 
merce, 66 n. 

United States Steel Corporation, 9, 69, 


United States Strategic Bombing Sur- 
vey, 128 n. 

Vanderbilt, Cornelius, 210 
Vanderbilt, William H., 71 
Vanderbilt, Mrs. William K., 45 
Vcblcn, Thorstein, 40, 41-3 
Veld, 26 
Versailles, 45 

Villard, Henry H., loi n. 

Voltaire, ii 

Wage control, 192-4; inflation, 174-5, 

Wage-price spiral, 171-2, 174-5, I79. 

193; and controls, 238 
Wages, Carey’s view, 38; fiscal policy, 
187, 192; inflation, 169, 171, 174, 
205-6, 231; marginal productivity, 
27, 28, 29; Marshall, 27; minimum, 
29; monetary policy, 179; prices, 171, 
172, 174-5. 192-3, 230-1; of public 
worker, 206; in steel industry, 171-2; 



Taussig, 28-9; unemployment cx>m- 
pcnsation, 228-35; unions, 171, 174; 
See also Iron law of wages 
Wages fund, 27 
Waldorf-Astoria, 45 
Wallich, Henry C., 75 n. 

Want creation and monetary policy, 
180-1; inflation, 181; social balance^ 
202-3, 207, 218. See also Dependence 

Washington, 8, 69, 133 
Watt, James, 21 1 

Wealth, inequality of, 30, 46; in pri- 
vately produced goods, 195-200; and 
social and political prestige, 68-73; 
U.S. foreign policy, 139-40; Veblen, 
41. See also Affluence 
Webb, Beatrice, ii 
Webb, Sidney, ii 
Weimar, 219 

Welfare state, ii 
West Virginia, 254 
Whitney, John Hay, 72 
Wiles, Peter, 129 n, 

Wilson, Charles £., 138 

Work, conditions of, 262, 265-6, 269; 

enjoyment, 266, 268; leisure, 264 
Workers, and inflation, 206; malinger- 
ing, 90, loi, 229, 298; 19th-century 
England, 102; search for economic 
security, 80, 82, 83-5, 86; unemploy- 
ment compensation, 230-5 
Work week, 237, 260-1, 262 
World War I, 17, 34, 103, 129, 130 n. 
World War II, 17, 65, 89, 103, 126-9, 
130, 133-6, 157, 164, 174, 178, 187. 
195-204, 207, 231, 266 
Wyllic, Irving G., 225 n. 

Yale University, 45 

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